Do You Need a Trust?
4 August 2017
DO YOU NEED A TRUST?
What Do You Want a Trust For?
Relationship Property? A Trust isn't bullet proof and you would need to get some expert legal advice around relationship property, and most likely have a relationship property agreement too.
To save tax? For most property investors, a Trust will be less tax effective, as any losses stay within the Trust and cannot offset personal income (so no tax refunds). For business and property owners that are making a real profit after a fair owner wage, a Trust is a great entity to spread income to other beneficiaries and minimise tax.
The main reason is asset protection.
The first part to consider is what are you protecting your assets from? What is your or your partner’s risk of being sued? I look at:
- Director risk: If you are a director in a company (such as a finance company, for example), then you have director responsibilities and risk. In a worst case scenario, you could be sued as a director.
- Trustee risk: Are you a Trustee in another person's Trust. If so, you could be liable as Trustee.
- Have you given personal guarantees?
- What is your potential risk to Health and Safety? If you are in the construction industry, this could be quite high! And it's not just owners who can be liable. Any employee could be held to be liable.
You need to consider these items and any others that might affect your risk or your chance of being liable.
If you have high risk, then a Trust would help to separate your assets from your risk. Generally, this would mean putting your personal home in a Trust to start with. For investment properties and businesses, you need to consider the structure carefully and there can be lots of catches or costs to restructure.
Setting up a Trust is only part of the process and you need to be aware of the ongoing administration and compliance requirements:
- New Trust laws (due to come in late 2017 or early 2018) setting higher obligations on Trustees.
- Normally you would have an independent Trustee. We charge $75 + GST per year for this service.
- For signing of documents as Trustee (e.g. Finance documents), we charge $75 + GST.
- If we are a Trustee, we require a compulsory annual meeting, normally done by phone. We charge $100 + GST for this phone meeting.
- Gifting. We charge $255 + GST.
- Annual Financial Statements, Minutes and tax returns for the Trust. This can vary widely depending on the work required, but is likely to cost at least $500 + GST per year.
- Trust Minutes and discussion for major transactions.
- Separate Trust bank account and keep Trust affairs separate to personal.
Setting up a Trust is done through a lawyer and normally costs $2,500 to $5,000 depending on what is included and what property needs to be transferred into the Trust.
In my opinion, when should you be looking seriously at a Trust?
- High risk as above
- Profitable business making $50,000 or more after fair owner wages
- Profitable rentals
- As your overall equity builds up to $1million plus, it is worth considering Trusts as you have more to lose.
I haven't put these items here as a 'sales pitch', but I hope they give you a realistic idea of the ongoing costs for a Trust and that all the little things can add up!
If you are a paying client of Coombe Smith, we have some information which we can give you for FREE:
- A list of Five Stategies for property investing
- A list of expenses you can claim
- Simple Spreadsheet for rental cash flow
- Simple Spreadsheet for trading properties
- Trading property notes, including information on GST and zero rating
- Rental Property Basics Seminar Video
- Advanced Property Investors Tricks and Tips Video.