Buying property in a trust

buying property in a trust

Before setting up a family trust and buying property, you need to consider whether a trust is a suitable structure for you and your family. There are substantial benefits associated with setting up a family trust, including estate planning and asset protection, but you’ll need to establish whether the benefits support your current financial circumstances and future financial goals. 

Entering the property market can be daunting. For many investors, one way to mitigate the potential risks of property investment is to establish a family trust. A family trust or a discretionary trust is a legal arrangement where the trustees manage trust assets on behalf of the trust beneficiaries (who benefit from the income of the trust).

Many people take advantage of the benefits of setting up a family trust, although this is a costly structure. When purchasing assets, especially buying property, in a trust then the benefits often outweigh the cost.

Let’s look at the process of how to buy a property through a trust and what the important things you should look out for are.

Why should I set up a family trust?

A family trust is a great way to hold assets, such as physical property or shares in a company. It allows you to safely hold your assets from creditors and to distribute your dividends to your family members for more tax effective outcomes.

What are the benefits of setting up a family trust?

A family trust provides a unique structure for those who want to provide for future generations without incurring any stamp duty or other expenses. The trust deed that governs a trust lays down what will happen to each beneficiary’s share on their death, avoiding messy battles for the property within the family.

What are the benefits of buying property in a trust?

The four main benefits of buying property in a trust are estate planning, tax benefits, asset protection, and profit distribution. 

Now let us take a closer look at the benefits of buying a property in a trust.

1. Estate planning

Trusts make it simple to transfer ownership of property when someone has died, has a disability, or is sick. The trust deed outlines how the trustee should proceed in such circumstances, preventing legal disputes which can often occur, especially within families. In some cases, the transfer of property in a trust when someone has died is exempt from some taxes and government expenses.

2. Tax benefits

A trust has its own tax file number and is required to lodge a tax return. However, if the trustee distributes all the income made from an investment property in the financial year to the beneficiaries of the trust, it is considered part of the beneficiaries’ income, and hence part of the tax return they lodge. Keeping in mind that some beneficiaries will be in lower tax brackets than others, this distribution of wealth can provide a significant tax break and save the members an enormous amount compared to if they had bought an investment property in their personal capacity. This is one of the major attractions of buying property in a trust.

3. Asset protection

In a trust, the trustee is the owner of all the assets. So, in the case of a beneficiary receiving income from an investment property and they then run into financial difficulty or face legal action, the assets (such as an investment property) may be protected from creditor claims or the law. This is one of the major advantages of owning property through a trust.

4. Profit distribution

Trusts can make it extremely easy to distribute wealth from investment properties as the trustee is legally obliged to act in the best interest of the beneficiaries.

How to buy a property through a trust?

You are on your way to buying property in a trust once you have established that a family trust is the right structure for you, you have set up the trust and found a suitable investment property. The next step is obtaining a home loan to purchase the property. Although it is possible to purchase a property through a family trust, it’s not an easy task. Unfortunately, this is because banks and other lenders perceive discretionary trust structures to be a higher risk due to the legal framework in which they operate. It’s very important you have a good finance broker who understands property investment and structures in order to secure you not only the best possible outcome but future investment as well

What is the difference between a self-managed super fund (SMSF) and a family trust?

A family trust is commonly established by a family member for the benefit of their family. A SMSF is a form of fund that can offer members of the fund greater control over their retirement savings than is available through other types of superannuation funds such as industry or retail super funds.

If you are considering setting up a family trust or switching to an SMSF it is best to consult with an industry professional. At creditte chartered accountants & advisors, our expert accountants can assist you with setting up a trust or your self-managed super fund, providing you with a sound investment strategy that gives you the flexibility and choice to decide where and how to best invest your funds.

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