Let's talk trusts: The pros and cons of buying property through a trust

You might know someone who's bought an investment property through a trust, has raved about it (using lots of jargon), and you'd like to know more. Let’s look at the pros and cons:

But first, what is a trust?

It's a financial structure where an individual or company owns assets on behalf of an individual or a group of people. One person, or company, aka the trustee, will look after an asset and distribute its' wealth to the other people (beneficiaries) in the trust. An asset can either be money or property.

Advantages

1.     Profit distribution

A trust makes distributing wealth from an investment property easier, as your trustee is legally obliged to act in the beneficiaries' best interests.

2.     Save on estate taxes

If a trustee distributes the income from an investment property to all beneficiaries in a financial year, it forms part of their income and can be claimed. Some beneficiaries may be in lower tax brackets than others, and this distribution of income may provide a larger tax break than in the case of purchasing an investment property alone.

3.     Asset protection

Probably the biggest pro; the trustee becomes the owner of all assets, protecting beneficiaries in bankruptcy or legal action from creditors or the law.

4.     It makes estate planning easier

If ever there's a way to prevent legal drama, we're in. A trust makes it easy to stipulate instructions (the trust deed) and transfer ownership of a property in the event of illness, incapacity or death. Doing it in this way also avoids some government charges and taxes.

Disadvantages

1.     Costs and time in setting up a trust

It takes a fair bit of admin to set up a trust structure. You also need to be sure you trust those you enter into a trust with. However, if you can get through these pain points, you'll be on your way to enjoying the advantages of being part of one.

2.     Complex rules & regulations

Before making any decisions, you really need to take the time to understand all the rules and regulations around being part of a trust, and there are quite a few.

3.     Transfer of Property

If you own an investment property and plan to transfer the ownernship of it into a trust, then be preapred to pay stamp duty, along with capital gains tax. The less time you've owned your property, the more expensive these charges.

4.     Higher banking fees & rates

This isn't a given, but given the complexity of trusts, many financial institutions will process applications through their business banking arm. This often leads to higher rates and higher fees, and longer application processing times.

We hope this has given you an idea of why people utilise buying property in a trust, and why they don’t. But we are NOT the experts when it comes to Trusts. Your accountant or financial planner is the person you should turn to to answer all your questions.. The advice as to whether or not to utilise a trust to purchase real estate is very much on a case by case scenario.

If you need a great accountant or financial planner, don’t hesitate to reach out, and we can put you in contact with someone!

Thanks for reading,

Tabitha