Property Investment TipsStructuring

Not Having A Trust Is The Biggest Mistake You Can Make

By 29/06/2021 July 12th, 2021 No Comments

LEARN WHY YOU NEED AT LEAST TWO TRUSTS AND HOW TO USE THEM CORRECTLY

Trusts are critical to build and protect wealth if you want to create financial freedom. Still, few people understand the benefits of using trusts or how to use them correctly.

If you want to build a prosperous life, you need at least two trusts:

1.    A FAMILY TRUST where wealth can be preserved.

This is a low or no-risk trust, primarily to protect assets.

2.    A separate PROPERTY TRUST (holding property directly) or HOLDINGS TRUST (holding shares in companies).

This is where you’ll build wealth. A Holdings Trust is regarded as low risk, and a Property Trust is regarded as medium to potentially high risk.

In one of our previous articles, Should You Buy Property in Your Name, a Company or a Trust?, we discuss in which entity to purchase property.

Now, let’s consider the benefits of having multiple trusts:

 

  • FINANCING CAPABILITY (TO BUYING MULTIPLE PROPERTIES)

When you want to build a property portfolio, you want it in an entity where the financing prospects look better and definitely not in your name. You want to run it like a business with a bank account and financial statements and in a separate entity.This enables you to build a significantly larger portfolio. Property trusts are a great way to do this and are the simplest approach for investors with small property portfolios. Once the property portfolio grows beyond a certain point, you can add to the structure by acquiring properties in companies with the shares held in a Holdings Trust.

 

  • ASSET PROTECTION (RING-FENCING) 

Trusts protect our assets in case something happened to us financially or if we had to die. It houses the wealth we build up over the years and offers better protection than when it’s in our name.But having all our assets in one trust does not offer sufficient asset protection. In a Property Trust, for example, there is debt, which means there is risk. If you default on the debt or levy payments or the rates and taxes, all the assets in that trust are exposed.

You can also not hold any assets in your name (this is the worst place to keep any assets) as you usually sign surety for any debt acquired in any other entity. Personal liability can also expose all the assets in your name.

This is why you MUST have a Family Trust that can hold assets and through which you can manage loan accounts to all other entities. You always donate the maximum to the Family Trust, lend what you can to the Family Trust, and then the Family Trust lends to all the other entities. Therefore, your Family Trust becomes the lender to all the other entities.

 

  • LEGACY (CONTINUITY)
There are estate duties, capital gains taxes, executors’ fees, and transfer fees when you pass away. These fees can wipe out a large portion of your wealth before your family see it. The only way to protect against this is by using trusts. However, moving assets to trusts can become difficult and expensive, especially with a larger estate, so you ideally want to build wealth within trusts from the beginning.

 

  • GREAT TAX BENEFITS (CONDUIT PRINCIPLE)

Using trust structures correctly yields excellent tax benefits. The conduit principle enables you to distribute gains (capital gains or net profit) to any beneficiaries. The beneficiaries will then pay tax on those gains as if it were their gains with the applicable exemptions, rebates, and tax rates. Often, you pay less tax in a trust than any other entity. You will never keep profit in a trust and pay the trust tax rates.  In one of our previous articles, Did Someone Say Tax Benefits? Sign Us Up!, we discuss this in more detail. P.S.  You should never hold company shares (even or especially property companies) in the Property Trust. If something had to happen in the Property Trust, these shares are exposed. Ideally, you want to hold company shares in a separate Holdings Trust. However, you can hold company shares in the Family Trust as shareholders have minimal liability (usually, the directors have more liability).

Note: If the Family Trust holds company shares, ensure that the Family Trust never signs surety as a company shareholder for your companies.

Remember when it comes to property investment and trusts, zero is a no-go, one is too low, and two or more is the way to go!

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