Trust or not to trust that is the Question

Should you Trust!

Choosing to own an investment property in the name of a trust is very popular due to a desire to distribute asset income, capital gains or offset losses in a tax effective manner and for asset protection reasons.

Property owners are often disappointed by the benefits actually achieved by use of trust structures for property ownership, and it may seem to the property investor that the trusts only real purpose is to cost them establishment fees and ongoing annual administration fees.

Trusts will work well in circumstances where losses from a negatively geared property can be offset against income and where there is a realistic need for an asset protection structure and where additional land tax payable due to the use of a trust does not cause hardship or make the investment unfeasible.

Those investors who cannot offset losses and incur additional land tax are often those disenchanted with the choice of trust structure for property ownership. So, trusts are not for everyone, every time.

Frustration about the use of trusts for property ownership, generally comes down to: –

(i) Insufficient consideration of the trust structure before the purchase is made. Whether a discretionary, hybrid or other trust is most beneficial will depend upon your circumstances in each instance and what you want to achieve and specifically whether the investment is for negative gearing or not. Investors buying multiple properties need to revisit the trust structure before each purchase, consider future land tax liability and consider if the use of the trust continues to serve their interests; or
(ii) Higher liability for land tax, due to state land tax thresholds being lower or nonexistent for trustee owners. With rapidly increasing land values and rising rates of land tax, this is becoming a more common problem; or
(iii) An inability to offset losses against trust income. Careful structuring is necessary to avoid this situation.

The decision as to the type of trust needs to be established before the contract is formed, as changing the buying entity after contract formation may lead to payment of double transfer duty by the buyer.

The decision as to the type of trust appropriate (if any) and the terms of the trust deed are critical to achieve positive benefits for the property investor and expert legal and accounting advice is recommended before the purchase is made.

This article was provided by Susan Sing