Borrowing in a Trust - Jessica Arabia, Finance Prospects

A trust is known as an arrangement which allows an individual or a company to hold ownership of assets on behalf of another person, family or even a group of people also known as the beneficiaries of the trust. Assets are owned on behalf of the beneficiaries and are controlled by an appointed trustee; the trustee can be either a corporation or an individual. The trustee is governed by a trust deed which sets out the rules that the trustee must follow and also outlines how any profits are to be distributed to the beneficiaries.

When it comes to making investment property purchases the most common types of trusts used that are eligible to carry out these purchase transactions are:

·         Discretionary Trusts

·         Self-Managed Superannuation Fund Trusts (SMSF)

·         Family Trusts

·         Service Trusts

·         Property Investment Trusts

·         Unit Trusts

·         Hybrid Trusts

The eligible trusts have the ability to apply for and qualify for home loans, however when going down this path the variety of the lenders and loan products available that have the capacity to approve such transactions regarding finance will in most cases be limited. It will pay to have a savvy and experienced mortgage broker in your corner to ensure the correct structure is set in place.

Advantages of buying property in a trust

·         You may be able to reduce your tax bill by distributing income to family members with lower taxable income making use of taxation benefits

·         Trusts allow you to control and receive income from assets without having them in your personal name. In some cases this may protect specific assets in the event should your personal situation turns sour i.e. sued for any reason or the unlikely hood you go through a divorce therefore ensuring all of your assets are  protected.

·         Some trusts may allow you to effectively pass assets on to future generations without paying excessive taxes or going through estate disputes allowing for estate planning.

Disadvantages of buying property in a trust

·         A commonly used and exercised strategy is to buy a small number of investment properties in one’s personal name in order to build up equity and have the ability to claim negative gearing benefits from the Australian Taxation Office (ATO). As the trust is a non-tax paying entity negative gearing can’t be claimed.

·         Set-up costs and annual accounting fees can be higher when owning a property in a trust due to the added complexity of tax returns and ongoing maintenance.

·         Using a mortgage broker that has experience with working with trusts will help you to be able to obtain the most suitable finance option that correctly works for you, after all your mortgage structure is critical.

Lender requirements

When assessing the loan application for a Trust, the specific lender will be mainly looking over the following information to make sure it fits and is acceptable within the specific criteria that needs to be met:

·        Type of trust

The types of trusts are assessed in a number of different ways and some lenders prefer only dealing with certain trusts such as the common discretionary or family trusts, meanwhile other lenders are happy to consider hybrid, property investor and self-managed superannuation fund (SMSF) trusts.

·        Credit file

The directors and beneficiaries of a trust have credit files but also in some cases, trusts themselves have a credit file as well. The lender will check the file for applications to other banks and to ensure there aren’t any blemishes just like they would for an individual going through a loan application.

·        Trust deed

The trust deed confirms to the lender the details of who the beneficiaries and trustees are. The deed will be looked over and assessed by the lender assessment team to make sure that the trustee has the power to apply for loans on behalf of the trust.

·        Loan structure

Many people choose to have the loan in the name of the trustee or director of the trustee company rather than in the name of the trust. The director of the trustee company is the borrower while the trust is the mortgagor. This method can be used to take advantage of negative gearing benefits when using a unit or hybrid trust.

·        Beneficiaries

It is a requirement by the lenders accepting of making a purchase within a trust that the beneficiaries are to be guarantors. In many cases trusts have two or more beneficiaries and these structures can in some situations make it difficult to borrow money.

In order for a lender to be able to process a loan application for a trust the following documents will need to be provided to the lender before the process can be finalised:

·         A certified copy of the stamped trust deed

·         A certified copy of the company constitution

·         Identification for all trustees, directors of trustees and beneficiaries of the trust

·         Tax returns and notices of assessment for the trust

If you talk to an experienced mortgage broker in this field they will be able to guide you through the processes involved and let you know exactly what documentation you will need to provide as well as answer any questions you may have along the way.

If you have any queries or a question regarding specific information around borrowing in a trust or loans in general, don’t hesitate to get in touch with our friendly team on 08 8344 9933 or email Jessica at jessica@financeprospects.com.au to find out more about the options available to you.