Before setting up a family trust, consider whether it suits you and your family. A family trust can offer estate planning and asset protection benefits. Consider whether these benefits suit your 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 or discretionary trust is a legal arrangement. Trustees manage trust assets for the beneficiaries.
Many people use family trusts for their potential benefits. However, they can be costly to establish and maintain. When you buy assets, especially property, through a trust, the benefits may outweigh the costs.
Let’s look at how to buy property through a trust. We’ll also compare it with other business structure.
Why should I set up a family trust?
A family trust can hold assets such as property or company shares. It can help protect assets from creditors and distribute income to family members for tax-effective outcomes.
What are the benefits of setting up a family trust?
A family trust can help families plan for future generations. The trust deed sets out what happens to each beneficiary’s share after death. This can help reduce disputes within the family.
What are the benefits of buying property in a trust?
The four main benefits 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. Because the trust itself remains the legal owner throughout, passing control between generations doesn’t require a new property transfer in the way inheriting a personally-held property would.
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.
If you’re weighing this up against holding property through your super instead, our guide to super due dates covers the compliance calendar that comes with an SMSF, which is worth reading alongside the comparison below.
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.
Trusts also come up constantly in broader tax planning strategy — distribution timing and structure both affect the tax outcome well beyond just property, so it’s worth reading that guide too if trusts are part of your bigger picture.
Thinking about buying your next property through a trust? Book a free discovery call and we’ll walk through whether it’s the right structure for you.
