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Getting funds into a trust - loan or gift ?

Discussion in 'Accounting, Tax & Legal' started by jscott, 2nd Feb, 2006.

  1. jscott

    jscott Well-Known Member

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    Just wondering what are the situations you would either gift money to a trust or lend it to a trust, say, for example to provide the funds for a deposit on an investment property, or to invest in a MF?
    I've seen discussion on "how" to do it in various acounting programs but what is the difference and pros and cons between loaning and gifting?

    Jason.
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

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    Legally there's quite a difference.

    Whilst it's easier from a tax perspective for seed money to be loaned into a trust it's safer from an asset protection perspective for the money to be gifted, preferably under a deed of gift, or at the very least with trustee's minute noting that an amount had been received by way of gift from X.

    Remember that a loan OWED to you is an asset of yours which can be called up (subject to its terms).

    N.
     
  3. jscott

    jscott Well-Known Member

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    Is there any difference in relation to tax? Also what is a "deed of gift"? Is there actually a formal document that can be used to gift something to someone?
    I've just bought a property here in Perth as trustee so just wondering what the best way of getting the funds into the trust is? Also, if I want to buy shares thru the trust...
    I guess at the end of the day - at tax time the accountant sorts all this out, but I'd still like to know in any case and I would like to try and keep my bookkeeping software as up to date as I can (myob). Thanks for the replies Nigel.
     
  4. TryHard

    TryHard Well-Known Member

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    Loan or units ?

    Nigel and NickM will know the real answer but this reminded me of something I found amazing :p :

    With the HDT I use, my understanding is its best to loan the Trust money for purchasing an asset that will be positively geared. I hope I understood that right - I'm not real up on how that works 'cos I don't have anything positively geared :p (but I do recall you need a proper legally sound loan document executed suitable for ATO scrutiny)

    For a negatively geared asset, you issue yourself units in the Trust. ie. John and Mary borrow $400,000 to purchase $400,000 worth of units in Trust A, and Trust A buys 123 Moneybags Street for $400,000. John and Mary then are able to claim negative gearing benefits (if its a HDT) on those borrowings which were incurred for investment producing purposes.

    The 'amazing' bit of Nick's presentation showed what happens when the property realises some equity. The Trust repays the unitholders their investment. So when 123 Moneybags Street is later worth $900,000, the Trust draws down equity of say $400,000 and John and Mary redeem their units (receiving the $400,000 cash from the Trust). But the Trust is then able to claim the that repayment.

    So in essence the individuals claim negative gearing benefits, till the assets appreciates enough, when the Trust refinances and claims the deductions for the repayments on the $400,000.

    I hope I haven't misquoted Nick, and I'm sure he will clarify if I have ;-)

    Hope that piques some interest (no pun intended)

    Cheers
    Carl
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

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    The concept you're describing is the refinancing principle. That is the trust can borrow money to make distributions to beneficiaries and the interest may be deductible. I say may because there are limitations on it. From memory there's a relatively recent tax ruling on this. Nick will have it to hand.

    N.
     
  6. TryHard

    TryHard Well-Known Member

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    Refinancing

    Oh. Maybe it was amazing a year ago, and not so amazing now ;-) Thanks Nigel. Hope Nick can enlighten us.
    :)
     
  7. NickM

    NickM Co-founder Staff Member

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    Good memory Carl
    Yes the refinancing principle still works providing the circumstances are right.
    If the trustee borrows to discharge a liability of the trust that is related to its income earning (ie redemption of units) then the interest would be deductible.

    the catch is that the trustee cannot refinance the $900 in carls example and claim interest on the lot.

    Re Gifts - if you gift the money to a trust and you have used a LOC or a loan then the interest will not be tax deductible. This is a consideration when considering your tax position vs your asset protection strategy.

    NickM
     
  8. TryHard

    TryHard Well-Known Member

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    Thanks

    You make things sound so much simpler put your way Nick :) Sorry for posting something only loosely based on fact ;)

    Cheers
    Carl

    PS hope you didn't mind me mentioning the whole shooting thing - I figured it was public knowledge from your presentation, and I was using it to highlight one of the points of difference of strategicwealth.com.au :D
     
  9. NickM

    NickM Co-founder Staff Member

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    no worries Carl
    brings a whole new meaning to bullet proof asset protection

    NickM