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Many property investors choose to hold their assets in a trust because of the level of security and control they get in terms of the management of their portfolio.
While it may seem complicated, OpenCorp’s Cam McLellan believes that the key to success lies in understanding the terms and laws that apply to this investment strategy, as well as the key players for its implementation.
Cam said: “[Back in time], trusts were mainly used by landowners to protect their land from greedy lords and kings … [because] 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,” he added.
There are still strict tax rules being implemented to this day, and the need to protect one’s assets has been stronger than ever.
Here are the most important people and entities involved in holding a property investment in a trust:
The beneficiaries are the people who benefit from the trust.
According to Cam: “If all proﬁt made by a trust went to one person, they could pay the highest tax rate, but because trust income is spread among beneﬁciaries, each person pays tax at their marginal rate—spreading the income achieves the lowest overall tax rate.”
There are different types of beneficiaries, but it is usually someone related to the investor by blood or marriage. You can also make a certain company your beneficiary and you or your family, in turn, will own that company.
“If you distribute enough proﬁt to beneﬁciaries, you can put extra proﬁt into a beneﬁciary company to be used later. Why? Because companies pay just 30 per cent tax. When beneﬁciary incomes exceed their tax bracket, they pay a higher rate,” he explained further.
Like the beneficiaries, the trustee can also be one or more people or a company, and he essentially manages the daily operations of the trust.
“To set up a trust, a settlor must give a small amount of money to be held in trust. I normally use my accountant as settlor. I never use a family member, as a settlor can’t beneﬁt from a trust,” Cam said.
The appointor is considered as the most important person in a trust because he has the power to appoint or eliminate a trustee. Property investors should make sure that they take on this key role—review the documents with a legal counsel or a trusted third party to be certain. Otherwise, you can be kicked out as a trustee and somebody else can take control of your assets.
As in all investment strategies, one must study the advantages and disadvantages of holding his assets in a trust and understand their goals, capabilities, and limitations in order to determine whether or not this is the best path to take.
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.