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Requirements on discretionary trust loan to beneficiary

Discussion in 'Accounting, Tax & Legal' started by bdl, 5th Jun, 2015.

  1. bdl

    bdl Member

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    I'm considering something similar to that described by RoyG in
    http://invested.com.au/4/trust-payments-beneficiaries-41200/ - the family / discretionary trust that my wife and I are trustees of, loaning an amount to myself for the purposes of investing (probably in a portfolio of growth-focused ETFs), on commercial terms. The intent is to distribute the trust's income from interest to the other beneficiaries on lower/zero marginal rates (incl. two 18+ students @ Uni).

    Now, I understand I'd need a "proper loan agreement" but does it have to be secured? (If so, I have a standard loan agreement template, but I guess what I want is a margin loan template?)

    Rgds,
    Ben
     
  2. Terryw

    Terryw Well-Known Member

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    Most people would do it the other way. Loan to the trust with the trust investing and distributing proceeds.

    It seems you are asking from a tax point of view. The ATO may have issue if the capital of the trust was a gift from the borrower initially. Assuming it is not then the trustee could probably borrow money off a beneficiary (assuming they are not the same person).

    ATO wants to see a written loan agreement on commercial terms. it could be secured or unsecured.

    I suggest you seek legal and tax advice.
     
  3. bdl

    bdl Member

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    Thanks Terry;
    Is there anything more to this approach than simply distributing the earned income from the loaned funds across the beneficiaries, yet maintain ownership of the funds? i.e. if you weren't concerned re. issues around ownership, is there any benefit of loaning funds to the trust vs. just gifting outright and forevermore?
     
  4. Terryw

    Terryw Well-Known Member

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    Yes there are many issues. One issue is death of the giftor. A loan comes back to the lender so will form part of his or her estate (assuming persons) whereas a gift will not (generally).