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There are two ways to hold a property—in your own name or in a trust—and many people assume that holding property in their own name is the safest choice because it gives them more control. But a lot of property investors opt for holding their property in a trust as it gives them the ability to protect their assets in the event of unexpected financial pressure.
OpenCorp’s Cam McLellan defines trust as “an arrangement where [a] property is held ‘in trust’ [by a trustee] for the beneﬁt of others [the beneﬁciaries]”.
While a lot of investors think twice about holding their properties in a trust, believing that it’s too complicated, the level of control that it can give them certainly has advantages in terms of maximising the potential of their investment. As in all investment strategies, the key to success lies in knowing your goals and how the strategy will fit in your journey as well as understanding the terms and laws that apply.
According to Cam, the first use of trust could be dated back to as far as 400 BC, when the Greek philosopher Plato used a non-profit trust to fund his university.
He said: “Trusts were mainly used by landowners to protect their land from greedy lords and kings. Back [then] … there were hundreds of taxes and limitations on what people could and couldn’t do with their land.”
“If a king or lord found [that] a landowner had committed a ‘crime’, they could throw him in jail—or worse—then seize his land and leave his family with nothing.
“This was why smart landowners moved the ownership of their land to trusts, which meant they weren't bound by the same tax rules and limitations as individuals. More importantly, their land was protected. If they were found guilty of a crime or sent to war, the king or lord couldn't take the land because the trust owned the land, not the individual,” Cam added.
In essence, the same tax laws apply today and the need to protect one’s asset is as important as ever. Many smart investors choose to use a trust to hold their assets as it gives them more security and control, but as in all investment strategies, it also comes with risks.
Here are some of the advantages and disadvantages of holding a property in trust:
In trusts, you own nothing but control everything, which is an ideal set-up for asset protection.
Cam said: “There are plenty of scumbags out there who’d start a lawsuit for a few easy bucks … If someone tries to sue you, your ﬁrst move is to sack yourself or the company [because you’re the appointor] as trustee.”
“[When] this is done, there’s no link for anyone to access the assets and, thus, no reason to sue,” he explained further.
You can also distribute income across your family members and pay a lower tax rate.
When you hold properties in a trust, you lose negative gearing, which enables you to offset losses and reduce taxable income. However, you can still carry these losses forward and offset them against future profits.
Accounting fees are also higher when you hold your assets in trust because the tax return could be a bit more complex.
Lastly, borrowing might be a little too complicated for some, and most people need the help of a broker or a relationship manager to navigate their way through their journey without making grave mistakes.
“Get your structure right. If you buy multiple properties in your name, it’s like stacking lots of blocks and waiting for a bully to knock them over—you risk everything crashing down. You also risk paying huge tax bills at a later date,” Cam said.
Aside from seeking help from a reliable financial team, it is also advisable for investors looking to hold their assets in trust to get a lawyer to prepare a legal will for them in order to avoid having your assets distributed against your wish.
Cam’s final advice for property investors: “The small initial tax advantage of holding a property in your name is far outweighed by the distribution and transfer of control beneﬁts of holding property in a trust structure. You and your family will be better off in the long run by using trusts."
Trust is a fiduciary relationship in which a trustor gives a trustee the right to hold title to property or assets for the benefit of a third party.