Apart from buying property in their own name, in co-ownership or in a company name, investors also have the option to purchase a real estate asset using a trust. Find out how this strategy works and whether it fits your long-term investment plans:
Essentially, a trust is a vehicle to hold assets. By establishing a trust structure, the trustee, or the owner of the trust, holds the assets for the benefit of specific persons or entities, or beneficiaries.
The two primary reasons for using trusts in property investment are asset protection and family estate planning. Other investors also take advantage of tax minimisation and flexibility in terms of transfer and reacquisition.
“If you're someone in quite a litigious environment, it's a really good idea to put your assets in a trust,” mortgage expert John Manciamelli highlighted.
Among the two most common types of trusts are Discretionary trusts and Unit trusts.
Discretionary trusts are the most common form of trust structures used by related parties such as families, where the trustee has the discretion to distribute trust income to specific beneficiaries.
On the other hand, Unit trusts are often used by unrelated parties who will be purchasing ‘units’ or separate shares in the trust, thereby, allowing them to divide the income and share of the asset based on the unit that they are holding.
Other types of trust include Hybrid trust and Bare trust, which are often deemed more complex than Discretionary and Unit trusts.
According to Mr Manciamelli: “Don't go down the Hybrid path. Banks don't like them and they will not lend. Unit trust structure, meanwhile, is a great way to negatively gear and provide some asset protection and family estate planning.”
While the level of control that a trust structure can provide investors certainly has benefits, particularly in terms of protecting their portfolio and maximising the potential of their investment, it also comes with risks.
For one, investors can lose negative gearing when they hold their assets in a trust and diminish their ability to offset losses and reduce taxable income.
Moreover, due to the complexity of the strategy, professionals services may be required, which will cost the investor a considerable ongoing expense.
As such, Mr Manciamelli believes that trust structures are not strict requirements for successful property investment. In fact, most people may not need them throughout their journey, according to him.
He highlighted: “Is it suitable for everyone? Absolutely not. Most people, even if they are self-employed, probably don't need to go down that path. It's a really good way to protect your assets, but it could be very complex.”
The mortgage expert strongly advised investors to consider their goals, capabilities and limitations before making any major financial decisions regarding their property portfolio.
Ultimately, the strategy, as in most wealth-creation strategies, will not be suitable for every investor.
According to him: “Asset-holding structures are really important. It's probably the thing that I will be talking about before even borrowing because it has tax and litigation implications as well.
“Talk to your advisors and accountants and create a long-term plan so you know how to go down the path,” Mr Manciamelli added.
Preparing an exit strategy can also help investors minimise the risks of using trust structure. Engaging a trusted lawyer for the preparation of legal documents can help ensure that investors are protected while being able to maximise their earning potential.
Tune in to John Manciamelli's episode on the Smart Property Investment Show to know more about trust structure and property financing in today's investment landscape.