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Lending money to a Trust

Discussion in 'Accounting, Tax & Legal' started by abetts, 27th Oct, 2009.

  1. abetts

    abetts New Member

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    Hi All,
    I've recently setup a discretionary trust and I'm currently in the process of purchasing a property within this new trust. I plan to provide some of the initial capital to the trust (primarily for the deposit) and wish to do this as a loan to the trust. Does the documentation of this loan need to be anything more formal than an item in the minutes?

    Regards,

    Ashley
     
  2. Rob G.

    Rob G. Well-Known Member

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    What people should do and what they actually do are two very different things.

    For tax purposes and asset protection, you might want a legally enforceable contract ... even if only a simple few conditions in writing.

    Mere payments to relatives or via discretionary trusts might be deemed a gift in the absence of other evidence.

    At call loans may become statute barred after a certain time, i.e. become property of the trust.

    Documentation by the lender stating conditions on the loan purpose might impose a trust upon it.

    The trust deed might say how such loans are to be treated in the absence of any formal documentation.

    If you want the loan secured against real estate, you will need to register a second mortgage which could run into problems with the trust's lender.

    Do you want to have priority over any other trust creditors ?

    Cheers,

    Rob
     
  3. abetts

    abetts New Member

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    Hi Rob,
    Thanks for your response. At this stage I'm not trying to do anything too tricky. I really just want to make sure that it is clear that the money coming from the trust to me is payment for the liability it has to me. Primarily from a tax point of view. Your mention of asset protection has me curious though. Could you give me a quick example of impacts on asset protection?
    At the moment I've personally paid the deposit on the property and want this to be shown as a loan to the trust (of which I'm the director of the Corp Trustee). When the property settles I will also be putting up the funds to complete which will come from a personal LOC. I want to show this second item as a pass through type arrangement to the trust (i.e. no gain for me, whatever interest I pay the trust pays. Fees also). I'd originally planned just to identify these arrangements as minute items. I might write them up as an agreement between the trust and myself stating intended purpose of the funds and other conditions of use/operation. If any one knows of a good resource in relation to this could you please let me know. I'm happy to pay a nominal fee. Especially if it is reusable.

    I must say I hadn't considered the creditors priority side of things. Is there something simple I could do that will put me up the list of creditors?

    Regards,

    Ashley
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Scenario like this:

    1. you borrow some money in your own name to fund an investment - possibly for tax planning purposes

    2. investment goes pear-shaped, you lose your job, you can't afford to meet the ongoing repayments on the loan, nor can you afford to pay out the loan shortfall (since the investment is now worth less than the outstanding loan).

    3. the lender seeks to force you into bankruptcy, at which point all of your assets become available to help clear the outstanding debts - including any money you've loaned to your trust.

    4. the courts may be able to force you to sell assets from your trust to meet the loan obligations to yourself, which in turn goes straight to the creditor.

    Other scenarios that would be similar to the above involve you being personally sued for some action you've taken where insurance doesn't cover it.

    It's not just theory - this stuff can and does happen.

    Not trying to convince you not to lend the money to your trust ... you need to weigh up the risks and the benefits - and if you do end up lending the money - make sure you keep that in mind before you enter into any other contracts or agreements which may see you personally liable for things in worst case scenarios.
     
  5. abetts

    abetts New Member

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    Thanks for the scenario Sim. I certainly have a feel for the potential impacts now. In the short term however I can't see how I can avoid lending the trust some capital as it is a new trust with little more than the settlors assets. I don't wish to gift as most of the capital lent to the trust will be borrowed money for me and therefore I want the trust to service this facility.

    Cheers,

    Ashley
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In your situation I'm not sure there really is much alternative than to lend the money and just be mindful of the risk that goes along with that.
     
  7. Rob G.

    Rob G. Well-Known Member

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    You will still need a clear written arrangement to avoid unintended legal consequences.

    e.g. Partly funding the purchase of somebody else's property could presume joint ownership with the other holding your share on trust. The bank would be very interested in that !!

    e.g. If it were a statute barred at-call loan, you might be deemed a settlor (especially if the original settled amount was small and token) and so tax effective discretionary distributions would be lost to any of your children.

    e.g. If you personally sign the purchase contract when paying the deposit but then get the settlement in the Trustee's name this could result in double stamp duty.

    I suggest you chat to your Accountant/Advisor how best to suit your circumstances.

    Cheers,

    Rob
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    As a matter of procedure, I would always makes sure that transactions like this are run through the trust's bank accounts - it helps avoid confusion as to who is the actual owner of the property.

    Always transfer money to the trust and have the trust write cheques when acquiring assets. Similarly, when disposing of assets, always have the funds paid to the trust bank account before you distribute it to beneficiaries. This shows a clear paper-trail which helps clarify exactly who did what.

    I don't have a problem with paying for small expenses personally and then submitting an expense claim to the trust to reimburse you ... but I would not do this for asset purchases - even for the initial deposit.
     
  9. abetts

    abetts New Member

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    Thanks Fellas,
    I can see that it this is an important item to get right so it's time to seek professional advice as you suggest Rob. Thanks to you both of you for bringing the importance of this item to my attention.

    I'm hoping not too much damage has been done so far. The contract, insurance and other expenses are in the trustees name atf the trust. I agree with the point of all transactions through the trust account as well. In this situation however the trust was still waiting on its TFN. I wasn't prepared risk the trust coping withholding tax as the money passed through the account (potentially putting the contract at risk). Hopefully after seeking advice the trusts finance structure will sorted by settlement.

    Thanks again for your help.