Investors often opt to hold properties in a trust as it gives them the ability to protect their assets in the event of unexpected financial pressure. Is it a strategy worth the risk?
OpenCorp’s Cam McLellan defines trust as “an arrangement where property is held ‘in trust’ (by a trustee) for the beneﬁt of others (the beneﬁciaries)”.
According to him, the level of control that a trust can give them certainly has advantages and maximises the potential of their investment.
The first evidence of trust structures dates back to as far as 400 BC, when the Greek philosopher Plato used a non-profit trust to fund his university, Mr McLellan said.
He highlighted: “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 a landowner had committed a ‘crime’, they could throw him in jail, or worse, seize his land and leave his family with nothing.”
Landowners decided to move the ownership to trust structures so they weren’t bound by the same tax rules and limitations as individual owners.
“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,” Mr McLellan explained further.
In essence, the same tax laws apply today and the need to protect assets is as important as ever.
Using a trust to hold assets provides more security and control, but it also comes with risks.
Here are some of the advantages and disadvantages of holding a property in a trust:
In trust structures, you own nothing but control everything, which is an ideal set-up for asset protection.
Mr McLellan 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.”
Investors can also distribute income to family members and pay less tax.
Investors can lose negative gearing when they use trust structures, which diminishes their ability to offset losses and reduce taxable income.
Moreover, accounting fees typically increase.
Mr McLellan said: “Accounting fees are higher when everything is held in trust. Take into account that the set-up fees and yearly accounting fees will also be higher because the tax return is slightly more complex.”
Also, you might need the help of a broker or a relationship manager to understand trust lending.
“Finance is more complicated and you need a broker or relationship manager at the bank who understands trust lending. Most do these days … [so they can] get [the] structure right,” the property professional highlights.
Every financial plan needs an exit strategy, according to Mr McLellan.
In order to minimise the risks of using a trust structure to hold assets, he suggested getting a trusted lawyer to prepare a legal will.
“If you have no legal will, your assets may be distributed against your wishes and this can get very messy,” said Mr McLellan.
“You built your portfolio, so make it clear who beneﬁts from all your hard work.”