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Trusts basics

Discussion in 'Accounting, Tax & Legal' started by jms, 13th Feb, 2008.

  1. jms

    jms Member

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    Hi,

    1) How do you "transfer" money from a personal account to the trust ? ... and how is it recorded on the trust's books ? Is it a loan to the trust ? Is it a "gift" to the trust ? This transferred money is to be used to buy shares.

    2) If all income and dividends, and any capital gains from the share assets are to be distributed at the end of each FY, then this means that all that will be left is the money that was transferred to the trust ( or whats left of it after buying shares ), correct ? What about interest earned on the transferred money ( or what's left of it ), which is on a cash management account .... does that need to be distributed too ?

    Regards
     
  2. Rob G.

    Rob G. Well-Known Member

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    I assume you are talking about a discretionary trust since you mention gifting.

    The following is grossly over-simplified:

    1A) You can loan a trust money, but it remains your personal asset. Therefore it is at risk to your personal liability.

    If the Trustee pays you a commercial rate of interest for the loan then it is your personal assessable income and you can claim deductions for your costs.

    The shares bought with the loan is the legal property of the Trustee and any net income after deducting any loan repayments to you may then be distributed to the beneficiaries. Losses are trapped within the trust.

    1B) Alternatively you can gift the money to the trust. The Trustee is the legal owner of the money, not you. Therefore (if done correctly) it provides some protection from your personal liability.

    You cannot claim deductions for borrowings to obtain the money you "gifted" as you are a discretionary beneficiary. The Trustee cannot claim a deduction for borrowings it has not made, but there is less likelihood of it making a loss now.

    The trust derives the income from the proceeds and distributes any net income to the beneficiaries.

    2) Net income is "attributed" to the beneficiaries - whether paid out or not.

    Undistributed net income might be taxed to the Trustee at the highest marginal rate (plus Medicare Levy). That is why net income is distributed.

    Unpaid present entitlements may be regarded as held on a sub-trust pending payment to the beneficiaries. In the meantime they could still be used to earn trust income. Alternatively, they could be regarded as a loan back to the trust - either interest bearing or otherwise. These entitlements are personal assets at risk to the beneficiaries.

    Don't forget that trust accounting income can often be greater than taxable income. Also unrealised capital gains from the shares can mean that trust property value grows even after distributing "net income".

    Typically, with a "buy & hold" strategy, the Trustee distributes dividends and franking credits whilst the capital value increases.

    When shares are sold and the CGT discount is applied, the Trustee might only distribute the discount capital gain to the benficiaries with the CGT liability and retain the other amount as trust capital. Combined with earnings from unpaid present entitlements, the capital can still grow.

    I suggest you do some reading on the different forms of trust to decide which suits you best from an asset protection and financial position.

    Cheers,

    Rob
     
  3. jms

    jms Member

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    So, I could load the money to the trust, even at 0% interest rate p.a. ? What do most people do ?

    Furthermore, from what I understand under a personal income assessment, you can claim interest cost ( e.g. interest being paid on margin loan ) as a borrower / lendee on your personal income assessment, but not the other way around where I personally am the lender to another entity, the trust ... which is I presume what you mean by "you can claim deductions for your costs".

    What component of the loan is deductable for the personal income assessment ? ... and where / how does one fill that deduction in one's personal income tax form ?


    So in short, if I "gift" to the trust, I could not get it back ( e.g. if I need the money in an emergency ). Correct ?

    It seems that loaning the money to the trust is more preferrable, assuming you can "call" to have part of the loan paid back. Is this what most do ?

    Then I have to write a loan agreement between myself and the trust, signed between the trustee ( also myself ) and myself. Correct? Never had written a loan agreement from scratch myself, always just reading and signing one.


    I have more questions from Rob's reply ... but I'll leave them for another post.

    Thanks,

    John
     
  4. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    jms,

    You really should be discussing these issues with your accountant.

    Mark
     
  5. Rob G.

    Rob G. Well-Known Member

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    As mark says, you choose the structure that best suits your needs.

    Then you work out the most effective way of funding/transferring assets.

    You need to consider issues such as asset protection, long term financial goals, superannuation, estate planning and tax effectiveness.

    This will dictate the structure - whether it is an individual, partnership, company, discretionary trust, unit trust, hybrid trust, discretionary trust with corporate beneficiary, partnership of trusts, etc.....

    This requires a detailed discussion with an advisor - even if it is just for passively holding investments !!!!

    Cheers,

    Rob
     
  6. Saskatoon

    Saskatoon Well-Known Member

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    jms,
    Nick Renton's book "Learn More About Family Trusts & Alternative Structures" (2005) gives a good outline. At the least you will know what questions to ask a professional.
    I borrowed it from the library, though it's not expensive compared to what it may save!
    Terry
     
  7. jms

    jms Member

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    Well, I expected more from this forum than a standard one-liner "talk with your accountant" reply. Of course I will talk to my accountant!

    What I was asking was for facts, not opinions on what anyone think I should do, as that would constitute financial advice and is a no-no.

    I just want to be informed BEFORE talking to an accountant. I have read so far "How to Legally Reduce your Tax Without Loosing Any Money" ( Book: How to Legally Reduce Your Tax ... without losing any money! - Knowledge Centre ) before coming to this forum. The book talks about trusts ( discretionary, hybrid, unit ... and their own kind of trust they specifically defined for property ).

    But I still want more information. Some more nitty-gritty, more details.

    So I have now "Learn more about Family Trusts" by N.E. Renton as per Saskatoon. Will take some time to read through it, although it was published in 2005, so I not sure which ones are still (ir)relevant
     
  8. NickM

    NickM Co-founder Staff Member

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    John, unfortunately on any forum you will get opinions. Facts/advice are based on facts provided. This is a forum where we all try to help each other out. You have not told us what type of trust it is so the people that have replied are raising very valid issues and pointing you in the right direction.

    I suggest that you make a list of questions, make an appt to see your accountant who is fully conversant with your structure and what you want to do, then seek his advice. You will find that as you discuss the issues with him/her more issues will transpire from the discussions and he/she should be able to provide you with some options.

    Generally a loan agreement with a trust is not required to be documented but if it is a fixed loan from a bank then it would be prudent to document it.

    It could be interest free but if you borrowed the money from a bank then you cannot claim the interest personally.

    Keep reading as the more you read the better informed you will be

    Cheers
    Nick
     
  9. Saskatoon

    Saskatoon Well-Known Member

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    jms,
    trusts have been part of our legal system for hundreds of years. Despite various governments' tinkering the principles are still the same. If you are not pushing the boundaries then Renton's book will be quite relevant :).
    How many politicians and business people use trusts as part of their financial strategy (the 800,000 or so trusts in Aust. must "belong" to a lot of people - probably not the average wage earner)?
    Your original Q's were good. Rob G's answer covered most of the points. I don't think capital gains have to be distributed each year - this is at the Trustee's discretion.
    Check in the book!