Why You Need At Least Two Trusts and How to Use Them Correctly

Let’s consider the benefits of having the correct structuring:

When building a property portfolio, you want it in an entity where the financing prospects look better. And you definitely do not want it in your name! You want to run it like a business with a bank account and financial statements in a separate entity.

This enables you to build a significantly larger portfolio. Property companies are a fantastic way to do this. It is important, however, that the company shares are held in a Holdings Trust to reduce your exposure.

Read our article on How To Run Your Property Portfolio Like a Business.

Trusts protect your assets if something happens to you financially or when you die. It houses the wealth you build up over the years and offers better protection than when the wealth is in your name.

But having all your assets in one trust does not offer sufficient asset protection. In a property entity, 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 entity are exposed.

The worst place to hold any assets is in your name, as you usually sign surety for any debt acquired in any other entity. Personal liability can expose all the assets in your name.

This exposure is why you MUST have a separate Family Trust that holds your assets and through which you can manage your loan accounts to all 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 more about the Family Trust in our article, Understanding The Purpose Of The Family Trust.

There are many costs when you pass away, including estate duties, capital gains taxes, executors’ fees, and transfer fees. These fees can wipe out a large portion of your wealth before your family sees it. The only way to protect against this is by using trusts.

Preferably hold personal assets in a Family Trust and company shares in a Holdings Trust (since company shares are assets that should not be in your name).

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.

But don’t let this stop you from building your wealth using trusts – the cost of moving your assets might be insignificant compared to what you will gain!

Using trust structures correctly yields excellent tax benefits!

Using companies to build your property portfolio is beneficial because of the lower income tax rates. The structured approach means 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 conduit principle for trusts enables you to distribute gains (capital gains or net profit) to any beneficiaries. The beneficiaries then pay tax on those gains as if they were their gains with the applicable exemptions, rebates, and tax rates. You often pay less tax in a trust than any other entity because profit is never kept in a trust, and you pay the trust tax rates.

Our top tip: Ideally, you want to hold your company shares (especially property company shares) in a separate Holdings Trust. Avoid holding company shares in the Property Trust that owns properties as well because if something had to happen in your Property Trust, these shares would be exposed.

Always 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!