Can I transfer my property into a trust in order to protect it?
Transferring a property into a family trust is a common strategy for asset protection.
There are various types of trust options available including discretionary trusts, non-discretionary trusts, and revocable trusts.
In particular, family trusts are recognised for their benefits including asset safeguarding and tax-related benefits. Additionally, they may be used as a means to help purchase a property.
What is a Family Trust?
A family trust is a legal structure that safeguards and manages family assets and businesses, for one’s personal benefit and their family’s. It serves as an estate planning instrument, enabling one to pass their assets to their beneficiaries after they pass away.
Assets vested within a family trust are not owned by any single individual but rather belong to a trust. Consequently, the trustee of the trust has the discretion to allocate income or capital to any of the beneficiaries.
The paramount feature that sets a family trust apart is its inherent discretionary in nature. This signifies that the trustee retains the discretion to determine the distribution of trust capital and income among the beneficiaries.
Family trusts can offer the following advantages:
Asset Protection:
A family trust helps you maintain control over your assets so that they cannot be dealt with by any person other than those who are entitled to them under the terms of the trust deed.
A family trust can be designed to protect property from creditors and future liabilities, such as divorce settlements or financial settlements.
The property is owned by a trust and therefore, creditors, and financial institutions cannot pursue it even if some of the beneficiaries declare bankruptcy.
It may circumvent inheritance tax impositions on property and other holdings. This avenue becomes particularly relevant should you wish to protects your assets against inflation, price changes and other factors.
Financial Benefit:
A family trust provides financial benefits, such as tax advantages and additional control over asset management. You can use the trust to buy, sell, rent, or transfer the ownership of a property without tax or stamp duty implications.
The trustee uses their discretion to distribute rental income whether equally or unequally among beneficiaries. Gifts within a family trust may be capital gains tax-free.
How to set up a family trust?
You may engage a lawyer including one of our own from Legalease Lawyers, to draft a trust deed, and with the assistance of an accountant.
The trust deed should outline the terms of the trust, how the trust will be managed, and how the assets of the trust will be administered. It may specify the beneficiaries and what they will receive from the trust.
You must appoint a trusted individual such as a family member or a professional who will be your trustee and carry out their obligations in good faith and in the best interest of the beneficiaries.
A meeting will be set up for the beneficiaries and the trustee to formally accept and sign the trust deed. A Memorandum of Wishes may also be discussed with the beneficiaries which establishes the way income and assets of the trust will be distributed.
The trust deed will be settled by placing a sum of money in the trust account through a settlor. An Australian Business Number (ABN) and Tax File Number (TFN) must be created and open a separate bank account which is necessary to carry out the business of the trust.
Lastly, all the documents of the trust deed must be stamped and the stamp duty must be paid as well. The amount may differ in each state or territory.
What if you have an existing family trust?
If you already have a family trust set up, you can simply use that trust to purchase a property which works similarly to any transfer of property title.
The trustee of that trust will take the interest of that property and they will become the new legal owner.
You can either choose to gift the property to the trust or enter into a contract of sale.
Gifting Property to Family Trust
Gifting a property to a family trust is undertaken by signing a gift deed, which establishes the transfer of ownership to the trust without payment. The process may be more complicated if there is still an outstanding loan on the property.
The first option you can choose when transferring the property title is to gift it to the trustee. The trustee and the trust will have to sign a gift deed which confirms that the ownership of the property is being transferred without payment.
If you still have an outstanding loan on the property, and the loan is being transferred to the family trust, the trustee will undergo the loan approval process which may make matters more complex.
You will need to engage the services of a mortgage broker and solicitor or conveyancer for legal advice on how to navigate the challenges of gifting property with an outstanding loan.
Selling Property to a Family Trust
Selling the property to a family trust is another way to transfer ownership. The process would be the same as any real estate transaction, except the individual or entity or title is the seller and the trustee is the buyer. The property can be sold below or at market value, either way, you may still be liable for the capital gains tax.
Whichever process you may go through, it is best to consult with an accountant or financial advisor to help you make the best decision for your circumstances.
The second option is selling the property to the family trust. This process would be the same as a buyer and seller entering into a contract of sale. You would be the seller, and the trustee would be the buyer.
You can either sell the property at market value or below market value by selling it at market value, or selling it to the trust at a price sufficient to pay off the existing mortgage.
Either way, your capital gains tax liability will depend on the market value price of the property.
Both have their implications and benefits and it is imperative to consult an accountant, financial advisor or tax agent for tax advice regarding the best sale option for your circumstances and it is up to you to choose what is best for you and your circumstances.
What are the Considerations?
Transferring assets into a family trust can be a costly exercise.
Beyond the asset protection and estate planning benefits, you must consider that the transfer of assets into the family trust may likely trigger capital gains tax liability and stamp duty obligations which you must check with an accountant, taxation specialist or financial advisor.
There are advantages and disadvantages that must be considered by you when opting for a family trust structure.
For example, the land tax threshold in some states is not applicable for properties owned by a trust. In addition, in New South Wales and Victoria, a family trust does not qualify for a land tax free threshold.
It is a great tool to help you minimise your liabilities on your property, protect family assets, and share distributions among your loved ones.
There are alternative strategies to achieve asset protection without transferring the asset into your family trust, depending on the circumstances. So before setting up a family trust and bearing the cost of transferring your assets into the trust, you will need to establish whether a family trust is a suitable option for you.
If you would like to weigh up the various options for your specific circumstances, the best way to do this is by engaging the services of an accountant, tax specialist or financial advisor. Thereafter you can engage one of our lawyers from Legalease Lawyers to prepare your trust deed and undertake any relevant transfers.
Disclaimer:
Please note that while effort has been made to ensure that the information provided in this guide is accurate at time of writing, the information contained is intended to be a general guide only. This information is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should seek your own advice for any legal, tax or investment issues mentioned against your own affairs.
Contact Legalease Lawyers on 0402 121 124 to guide you through the process.
