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Reinvesting Trust Income

Discussion in 'General Investing Discussion' started by Heavy, 8th Jun, 2008.

  1. Heavy

    Heavy Member

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    Hi all,

    I have a question about the income that a trust receives from its investments. How would you go about reinvesting this income to purchase more assets for this trust? Can you simply reinvest immediately, or do you have to distribute the income to beneficiaries, pay tax on the income, direct this money back to the trust and then purchase more investments?

    Thanks for any ideas.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You can reinvest immediately, but you still have to "distribute" the income and pay tax on it.

    However, the distribution can be a "book entry" which effectively converts the distributed income into an interest-free loan from the beneficiaries back to the trust without physically transferring the cash out of the trust and back again. This is how we do it.

    This means that at some point in the future, the beneficiaries who loaned the money to the trust have a right to claim a payment of money from the trust tax-free equivalent to their loan balance (tax-free because they have already paid tax on it).

    You need to make sure it is all documented and executed correctly, so check with your accountant to make sure there are no implications for doing this.

    Also note that the beneficiaries will still have to pay tax on the money that was distributed to them and loaned back - even though they no longer have the cash (or indeed never received it at all!). If they can't afford to pay the tax owing, then either don't distribute to them, or let them keep enough of the distribution to cover their tax bill and then lend the remainder back to the trust for reinvestment.

    If the beneficiaries are adults, you'll need their permission to do this - if you distribute to them, they have a legal right to the money and you can't withhold it arbitrarily (although if it is a discretionary trust you could just not distribute to them in the first place).
     
  3. Rob G.

    Rob G. Well-Known Member

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    Discretionary trust ?

    Any corporate or trust beneficiaries ?

    Cheers,

    Rob
     
  4. Heavy

    Heavy Member

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    Thanks for that info Sim. I now understand how the system works. I'll talk to my accountant about this some more. I usually like to know a little about something before I ask the accountant so I don't get a skewed understanding. Thanks.


    Rob G,

    I was actually referring to both a Discretionary trust and a unit trust that the DT is to be a unit holder of.

    Some like mided individuals and myself are looking at pooling our money together to purchase investments through the unit trust. The income received is primarily going to be used to reinvest and the remainder (if any)passed on to our respective discretionary trusts. There is also a company unit holder that we use to purchase non appreaciating assets that we all have access to. This company is a unit holder in order to receive income that we use to buy the assets with.
    This is what we have come up with so far.

    If you have any suggestions or criticisms they will be greatly appreciated.
     
  5. Rob G.

    Rob G. Well-Known Member

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    Its a pretty open question - it depends on your individual and collective objectives and personal situations.

    Better to consult an advisor earlier on to get some idea of your options which are many.

    As well as unit trusts with units owned by your respective DTs, there can also be partnerships of trusts.

    The hybrid discretionary trust can be useful for collective investment or business activity due to its enormous flexibility.

    Cheers,

    Rob
     
  6. Heavy

    Heavy Member

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    Hey Rob G,

    I had no idea that the mechanics behind trusts were so diverse. That's why the question was so open.
    Thanks for the idea about the Hybrid. I'll certainly look into that further. That may be what we need in order to have more control over the distributions each year.

    Also, if someone could clear up two more queries that I have. Everywhere I have looked I seem to get contradicting information.
    The first is, does the use of a company trustee enable the trust to continue operation indefinetly?
    Second is, from what I have seen so far, discretionary trust beneficiaries must be related in some way and participants in other trusts (unit and hybrid) don't have to be. Is this true or am I missing something.


    Thanks,

    Heavy
     
  7. Rob G.

    Rob G. Well-Known Member

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    Corporate Trustees add another level of asset protection where they purely act as Trustee for passively managing investment assets.

    You can change Trustees, but it is a paperwork nuisance since they have legal title to the assets. A corporation is good here, since individuals can change as directors whilst the corporation has infinite life.

    Most States have a limit on the life of a trust. Exceptions being trusts for a purpose (e.g. charity).

    Another exception is managed investment schemes that are regulated by the Corporations Act. This might apply to widely held trusts.

    Discretionary trusts typically are restricted in their distributions to "classes" of potential beneficiaries. This usually means family members or trusts and companies in which the family members are beneficiairies or shareholders. Within the particular classes, the Trustee has discretion on who gets the distributions.

    This is a restriction on the power of the Trustee as provided in the deed. It is usually a way for the trust Creator to retain some control over who gets the benefit of the trust property.

    Without this restriction, you may as well gift the property to the State and let everybody be a potential beneficiary !!!

    Cheers,

    Rob