The Investor’s Guide to Trusts

Investing in a business can be exhilarating and challenging at the same time. It offers you new learning opportunities and experiences unlike any other. As an investor, you must be aware that successful investing isn’t easy. Every investor wants to see their money to work for them. If you won’t be careful, poor investment can eat up all your money in a blink of an eye.

There are three main factors you must take into consideration when evaluating the most appropriate ownership structure for your investment. Optimizing these three factors properly can help you minimize your overall risk and tax, as well as providing you with peace of mind and maximum flexibility into the future.

Here are the 3 main factors you must keep in mind:

Estate Planning which involves preparing your will, appointing an executor of this will, determining a power of attorney and establishing trusts.
Asset Protection that is especially important for those individual with high-risk occupation profiles. It is important for people with these profiles to look at buying a property with a structure which protects their assets in the event that they are involved in any professional indemnity, public risk or product liability insurance claims or lawsuit.
Tax Planning which is the analysis of a financial situation of plan for a tax perspective. It is vital to have solid tax planning strategy to benefit your wealth creation.

If you are a newbie to business investments, you must learn all the basics. And by basics, that includes investment trust.

Investment Trust can allow you to pool your money with that of other investors to get exposure to a range of assets through a single investment. Investment trust come in a few different forms and are typically more flexible than other structures available for investors. They also offer more asset protection.

Of all trust structures, let’s breakdown the most commonly used for property purchase:

Unit Trust exists where the assets owned by the trust are divided into defined portions known as ‘units’. Unit ownership by the trust’s beneficiaries can be likened to the way in which shareholders hold shares in the company. Each beneficiary’s share of the trust’s income, and consequently the taxation liabilities and related expenses, is proportional to the number of units that they hold.

This means trusts allow some flexibility in the distribution of the income and capital that is generated by the entity. In general terms, trust units can be allocated to beneficiaries as either ‘capital’ or ‘income’ units as they will be taxed at a lower rate. Unit holders who are on higher marginal income tax rate are more likely to be allocated ‘capital units.’

Family Discretionary Trust offers more maximum flexibility of the distribution of income. The most common structure of a family discretionary trust is usually controlled by a husband and wife and does not include anyone outside the family. The trustee of this type of trust has complete discretion when it comes to the distribution of income and capital amongst beneficiaries, unlike the unit trust where income is distributed in proportion to the amount of units held by each beneficiary and as dictated by the deed.

Unlike a unit trust, the family discretionary trust does not allow for beneficiaries to dictate the transfer of their proportion of trust ownership on the event of their passing. Family discretionary trust deeds dictate that there is a distinct and defined flow of ownership rights.

Hybrid Trust is a combination of both unit and family discretionary trusts. The trustee of a hybrid structure has the discretionary power to vary each beneficiary’s entitlements and incomes.

As a hybrid trust has ‘units’, any interest that is paid on monies borrowed and used to purchase these units can be claimed as a deduction as this process is likened to the purchasing of shares as with a Unit Trust structure.

Under the investment trust lays all the pros and cons that you must learn as an investor, just like in any other things. Even between these relatively similar structures, there can be diverse taxation and other factors to be considered as the details will differ for each individual situation. It can have several advantages, but it can also have disadvantages as well.

Advantages include:

Asset Protection where you can expect that when any beneficiary become bankrupt or financially troubled such as being sued for example, any assets that are owned by the trust cannot be touched by the creditors.
• 50% Capital Gains Tax discount most trust structures are eligible for a 50% CGT discount on all capital gains that are produced, as long as the asset has been held on for more than 12 months.
• Cheaper and easier than a company structure
• Fewer regulations where units can generally be easily transferred and re-acquired without any legal problems.
Disadvantages on the other hand include:
• Transferring property into trust trigger stamp duty and CGT will make the trust liable to pay stamp on duty on acquisition of the asset.
• Rental loss quarantined
• Capital loss quarantined

Your lawyer or accountant can explain not only the short term but as well as the long term intentions for the trust. Making the wrong choice initially could potentially cause problems down the track, with perhaps the most notable being the loss of tax concessions and deductions, as well as potential liability for other costs that may not apply to you otherwise. But if you will be mindful of all the basics that your investment may need, you can assure that your business is safe and is running on the right track.