THE TOP REASONS FOR USING THE CORRECT TRUST STRUCTURING
When you build your property portfolio correctly and within the correct structure, you can build a significantly larger portfolio and pay significantly less tax.
In our previous article, How To Run Your Property Portfolio Like a Business, we mentioned that your property portfolio should be in its own entity with its own bank account and annual financial statements.
So, what should your property portfolio’s structure look like? Ideally, you want to own your properties in a company with a Holdings Trust holding the shares in the company. Alternatively, one can also hold property directly in a Property Trust. You’ll notice there is always a trust in the picture.
Below are the reasons to use correct structuring.
FINANCING CAPABILITY
When you approach the bank or an investor for financing or funding, they will take you more seriously because there is structure to your ‘business’. Also, since you are not applying for loans in your personal capacity, acquiring multiple properties and financing them becomes more likely. This enables you, over time, to build a significantly larger property portfolio.
Read our article, To Restructure or Not to Restructure your Property Portfolio, if your property portfolio is not structured correctly.
TAX BENEFITS
Because of the structured approach, you will also pay less tax because when annual financials are prepared, income and expenses are better recorded, and many expenses are tax deductible. The effective tax rate paid in a well-structured property portfolio is much lower due to lower tax rates in the correct entities and the conduit principle in some instances.
ASSET PROTECTION
Trusts protect our assets if something happens to us financially or when we die. It houses the wealth we build up and offers better protection than when it’s in our name. Without a trust, you cannot protect what you have built up.
Don’t hold any assets in your name. It’s the worst place to keep assets as you usually sign surety for any debt acquired in any other entity. Personal liability can expose all the assets in your name.
This is why you MUST have at least a Holdings Trust to hold the shares of your property company (and other companies). You should also ideally have a separate Family Trust to hold personal assets and through which you can manage your loan accounts to all your other entities.
P.S. You always donate the maximum to the Family Trust and lend what you can to it, and then the Family Trust lends to all your other entities. Your Family Trust becomes the lender to all your other entities.
Read our article, Understanding The Purpose Of The Family Trust, to learn more about the role of the Family Trust.
ESTATE PLANNING
There are many costs related to death, including estate duties, capital gains taxes, executors’ and transfer fees. They can wipe out a large portion of your wealth before your family sees it. The only way to protect against this is through trusts.
If you can, build your wealth within trusts from the beginning, as moving your assets to trusts can become difficult and expensive, especially with a larger estate.
Start taking advantage of the benefits of correct structuring today and watch your portfolio soar!