The Pros and Cons of Using a Family Trust for Property Investment

The Pros and Cons of Using a Family Trust for Property Investment.

When considering investment strategies for purchasing property, one option that has gained popularity in Australia is the use of a family trust. At Aus Investment Properties, we often find that clients exploring investment structures consider family trusts due to their tax benefits and asset protection. However, it’s essential to fully understand how a family trust works and its advantages and disadvantages before incorporating it into your investment strategy.

What is a Family Trust?

A family trust is a legal arrangement where a trustee holds assets for the benefit of family members, who are known as the beneficiaries. It is a type of discretionary trust, which means the trustee has the flexibility to distribute income and assets at their discretion. This structure is especially popular among property investors because of the tax planning opportunities and the additional layer of protection it provides for family assets.

What Are the Different Types of Trusts?

There are four common trust structures that investors can consider:

• Discretionary Trusts (or non-fixed trusts): These trusts offer flexibility in how the trustee distributes both income and capital from the trust. Family trusts are a common example of this structure.
• Fixed Trusts: In a fixed trust, the beneficiaries' entitlements are predetermined, and the trustee has no discretion in distributing income or capital (for instance, unit trusts).
• Class Trusts: Similar to discretionary trusts, the trustee has flexibility in distributing income and capital, but a specific portion must be allocated to a designated group as outlined in the trust deed. This structure is often used when multiple families invest in a shared asset.
• Hybrid Trusts: A hybrid trust combines features of both fixed and discretionary trusts. The trustee has the discretion to allocate assets but must follow the specific entitlements of each beneficiary. For example, one beneficiary may receive income while another receives capital.

Among these options, the most popular trust structure for property investors is the family trust.

Benefits of Using a Family Trust for Property Investment

Asset Protection One of the most significant advantages of using a family trust is asset protection. Since the investment property is held in the name of the trustee, not the individual beneficiaries, it is shielded from creditors. This protection is especially beneficial if any of the beneficiaries face legal issues or bankruptcy, as creditors cannot claim the property to settle debts.

Effective Tax Planning Family trusts offer flexibility in distributing income from the investment property. The trustee can distribute more income to beneficiaries who are in lower tax brackets, thereby reducing the overall tax liability of the family. Additionally, if the property is held for more than 12 months, the trust can benefit from a 50% capital gains tax discount when the property is sold, making it an attractive option for long-term investors.

Estate Planning A family trust can also simplify estate planning. The trust deed can outline how assets will be passed down to future generations without incurring capital gains tax or stamp duty. This ensures a smooth transfer of wealth, minimizing disputes and legal complications.

Risks and Considerations of a Family Trust

While family trusts offer clear benefits, there are also some potential downsides that investors need to be aware of.

No Negative Gearing Benefits If your investment property is negatively geared, meaning it operates at a loss, you won’t be able to claim those losses against other income as you would if you owned the property directly. These losses are essentially “trapped” in the trust until the property generates enough income to cover them.

Land Tax Implications In certain states, such as New South Wales and Victoria, a family trust may not be eligible for the land tax-free threshold, meaning you could end up paying more in land tax compared to owning the property personally. It’s essential to understand the land tax rules in your state before setting up a family trust for property investment.

Costs of Setting Up and Maintaining a Trust Establishing a family trust involves legal and administrative fees, and the ongoing management can be costly. You will need to ensure that the potential benefits outweigh these costs to make the structure worthwhile for your investment strategy.

Stamp Duty and Capital Gains Tax on Transfers If you already own a property and want to transfer it into a family trust, you will likely need to pay stamp duty and capital gains tax, making it an expensive move. It’s important to factor these costs into your decision-making process.

Is a Family Trust Right for You?

A family trust can be an effective tool for property investment, offering advantages in tax planning, asset protection, and estate management. However, it’s essential to consider both the pros and cons and assess whether the trust structure aligns with your investment goals and personal circumstances. At Aus Investment Properties, we recommend consulting with a tax specialist or financial advisor to determine whether a family trust is the right choice for your next investment property.

Key Takeaways

• A family trust is a popular vehicle for purchasing investment properties, providing benefits such as tax efficiency, asset protection, and estate planning.
• It’s crucial to weigh these advantages against the costs, such as the inability to claim negative gearing benefits and potential land tax liabilities.
• The decision to use a family trust should be made in consultation with a tax or financial professional to ensure it aligns with your long-term investment strategy.

At Aus Investment Properties, we are dedicated to helping investors navigate the complexities of the property market. Whether you're considering a family trust or another investment structure, our team is here to guide you in finding the best property opportunities across Australia, including high-growth areas and off-market properties. Visit our website at www.ausinvestmentproperties.com.au to explore more options and get in touch with our experts.

Disclaimer: While every effort has been made to ensure the accuracy of the information in this guide, it is intended to serve as a general overview for property buyers and investors. This guide is not comprehensive and should not be considered as legal, tax, or investment advice. We recommend seeking professional advice for any legal, tax, or investment matters relevant to your individual circumstances.