Property is a national pastime so it’s no surprise that property investment is one of the most popular choices for wealth creation.
You can usually buy property:
- in your own name;
- in co-ownership with another person or entity;
- in a company name;
- using a trust.
There are pros and cons to each and the most appropriate ownership type will depend on your circumstances.
Here is some general information about using trusts to buy investment properties.
What is a trust?
A trust, simply put, is a vehicle to hold assets. A trust is established by a trust deed.
The trust deed is a legal document setting out the terms where a person or company (the trustee) holds assets (trust property) in trust for the benefit of others (the beneficiaries).
The appointer has the ultimate control of the trust as they can appoint and remove trustees. The trustee of the trust is the legal owner of the property.
Trusts are often used to buy investment properties because of:
- asset protection; and
- tax minimisation.
Investment properties carry more risk than an owner-occupied residence. If you develop the property, or rent it out, and an accident happens that’s not covered by insurance then you could be liable for damages.
Similarly, if you run a business or are involved in a risky profession then you are at risk of being sued.
If you are sued, become bankrupt and own all your properties in your own name or the same entity, then all those properties could be at risk.
To mitigate this risk and avoid properties being available to creditors, investors commonly own properties in several different entities such as trusts.
There are also tax advantages as income from property (e.g. rent) owned by some trusts can be distributed to beneficiaries with lower tax rates.
If you distribute some or all of the trust income to a beneficiary with lower incomes there will be less tax payable.
Types of trusts
Trusts come in many forms:
- Family discretionary trusts: are the most common types that are used for related parties such as families. The trustee has the discretion to distribute trust income to particular beneficiaries.
- Unit trusts: usually set up between unrelated investors that purchase separate shares or ‘units’ in a trust and the income and share of the asset is proportionate to their unit holding.
- Hybrid trust: a more complex combination of the two trust types above, often used where more than one unrelated party is involved: for example, two separate family groups who are buying an investment property together.
- Bare trusts: sometimes called holding trusts or custodian trusts. These are special trusts that are set up so that superannuation funds can borrow money to invest (which ordinarily they are not able to do).
How can you set up a trust?
The trust deed is an extremely important document that must be prepared correctly so you should seek professional advice.
Your accountant or solicitor can organise for the trust deed to be prepared. It can cost on average up to $2000 to establish a discretionary trust and more for more complex trusts.
It can be much costlier if the trust deed is not set up correctly at the start.
You will need to decide on the trustees and beneficiaries. The trustee can be a company (known as a ‘corporate trustee’), or one or more individual.
A corporate trustee adds an extra layer of asset protection but costs more to set up (as the company needs to be registered).
When should I create a trust?
You need to consider how you will buy your investment property before you sign the contract.
If you don’t and you want to transfer ownership after settlement, then you may end up paying stamp duty twice; once on the initial purchase and then again when you transfer the property to the trustee.
If you change your mind before settlement, but after signing the contract, then there can be substantial costs involved and possibly double stamp duty depending on the circumstances and jurisdiction.
If a trust structure suits your circumstances then you should set one up before signing any contract. It can take several days and sometimes weeks for more complex trusts to be set up so plan ahead to manage expectations.
Get professional advice
Trusts can be really useful tools to purchase investment properties, but you should speak to your accountant and lawyer to find out if they will suit your circumstances.
Article supplied by Catherine Fricker, Legal Advisor, Lawlab.