Purchasing a property through a family trust – everything you need to know

While purchasing a property through a family trust isn’t anything new, typically it has been something done primarily by the wealthy. In recent years though, more and more Australians have seen the value in setting up a trust for the purpose of purchasing investment properties. Buying a property through a trust generally comes with a higher degree of asset protection and lower tax liability than a standard investment purchase.

But to know whether purchasing through a trust is right for you, first you’ll need to know exactly what a trust is and the upsides and downsides of using one.

What is a trust?

A trust is a financial structure that allows a person or company to hold and manage assets on behalf of another person or group of people. Under a trust arrangement, which is governed by a trust deed, the trustee holds and controls assets for the benefit of the beneficiaries of the trust. There are several kinds of trust structures that are used by businesses and investors. However, family trusts or discretionary trusts remain the most popular with property investors.

In a family trust, assets are owned by the trust itself rather than being held by any one individual. The income and assets of the trust are distributed amongst the beneficiaries in such a way as to minimise the payable tax of each family member. The trust can borrow money from lenders in the same way an individual would; however, some lenders put particular restrictions on trusts when lending money to them.

Advantages of using a trust. 

The benefits of purchasing a property through a trust can be generally broken down into three key areas: asset protection, estate planning, and tax benefits.

Asset Protection

All assets held within a trust are the property of the trust, not any one individual. This means that if any single beneficiary of the trust were to default, go bankrupt, or be sued, the property would be protected from creditors.

Estate Planning 

Passing property from one generation to the next via a family trust removes many possible complications from the process. Exactly what will happen to all assets in the situation of death or disability is clearly and precisely laid out in the trust deed, ensuring that disputes or legal battles are avoided if the worst were to happen. Using a trust to pass down property also comes with the added benefit of avoiding paying stamp duty or capital gains tax.

Tax Benefits

If the trust were to make money, that income could be distributed among beneficiaries in such a way as to minimise the payable tax of all beneficiaries each year.

Disadvantages of using a trust

Setting up a family trust for the sake of managing your investment property purchases may seem like a clear choice at this point. Still, as with all financial decisions, it is crucial to consider the potential downsides as well.

Complexity

A trust can be difficult to set up, particularly if you have a unique situation or special requirements. You will need to be aware of all of the regulations and requirements of setting up and managing a trust, and seek the advice of a financial expert before you get started.

Lender Restrictions

Some lenders won’t lend to a trust at all, while others may apply higher fees or rates or require a lower LVR.

No Negative Gearing 

If you’re planning on employing negative gearing as a strategy, then a trust probably won’t be the best option for you. If the trust were to make a loss, it wouldn’t be able to share this loss with the beneficiaries, meaning you won’t be able to use any losses to offset your income when it comes to tax time.

If you think that setting up a trust to manage your property purchase might be right for you, a good first step is to have a chat with a broker. A mortgage broker can help you decode the complex financial terms and regulations that come with setting up a trust, and offer advice tailored to your particular financial needs.