How trusts work

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Forums › Finance and wealth management › How trusts work

Lizard1977

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#280258 4-Dec-2020 15:36

Before I get to my question, I'll preface it with some comments/context to head off some obvious responses:

I will make contact with an actual financial advisor/trust lawyer or other appropriate person, who will be able to give me official advice and information. My question here is really just to try and test whether it's even worth considering it further.
I'm being vague about details because I'd rather not disclose any specifics on an open forum. I realise that what I'm asking may be an odd way to structure things, but I do have reasons for considering it (which I'd prefer not to go into on an open forum).

So my questions are:

Is it possible to set up a trust where the trust owns property and pays the mortgage?
Would the trust's ability to take out the mortgage be assessed against the income of the trustees?
If the trust owned property that we lived in, would we pay rent to the trust so that the trust could pay the mortgage?

clinty

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#2616370 4-Dec-2020 15:41

Perhaps this may help

http://www.wynnwilliams.co.nz/wynnwilliams/media/Articles/Lending-to-Trusts.pdf

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Sounddude

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#2616372 4-Dec-2020 15:52

Trusts can't actually own the property.

The properties are owned by the people in the trust and an independent trustee (like your lawyer or accountant).

The Trust is basically an legal framework on how the property is owned which also have protections

Lots of accountants/lawyers to talk to about trusts. I would highly recommend getting one if you are buying into a house with mutliple people.

Lizard1977

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#2616373 4-Dec-2020 15:53

Thanks. I found that a few days ago when I was looking for general guidance about trusts. It seems to indicate that a bank lends to the trustee(s) rather than the trust. Is that how you would interpret it?

Sounddude

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#2616375 4-Dec-2020 15:54

Lizard1977:

Thanks. I found that a few days ago when I was looking for general guidance about trusts. It seems to indicate that a bank lends to the trustee(s) rather than the trust. Is that how you would interpret it?

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wellygary

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#2616377 4-Dec-2020 15:58

Short Answers

1) Yes there is nothing to stop a trust owning a property and servicing a Mortgage,

2) most likely, Its up to the Bank

3) Here things get really sticky.....

Mortgage interest is a non deductible expense for individuals, it is likely deductible for trusts on investments..

Structuring home ownership via a trust to allow such mortgage deductibility (you are likely the settler, beneficiary and funder - via rent, of the trust) is unlikely to pass muster from IRD....

Also the recent increase in the top tax rates to 39% will also breing mush more scrutiny on Trusts by IRD as they have a lower 33% top rate..

Lizard1977

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#2616387 4-Dec-2020 16:10

wellygary:

Short Answers

3) Here things get really sticky.....

Mortgage interest is a non deductible expense for individuals, it is likely deductible for trusts on investments..

Structuring home ownership via a trust to allow such mortgage deductibility (you are likely the settler, beneficiary and funder - via rent, of the trust) is unlikely to pass muster from IRD....

Also the recent increase in the top tax rates to 39% will also breing mush more scrutiny on Trusts by IRD as they have a lower 33% top rate..

Not sure whether this would help or not, but we're not looking at a trust to claim deductions for tax. Quite happy (as much as anyone is happy) to pay interest. It's more about whether the trust enjoys the combined income "power" when applying for a mortgage.

wellygary

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#2616393 4-Dec-2020 16:21

Lizard1977:

Not sure whether this would help or not, but we're not looking at a trust to claim deductions for tax. Quite happy (as much as anyone is happy) to pay interest. It's more about whether the trust enjoys the combined income "power" when applying for a mortgage.

Oh, I see what you are saying,

The trouble you will be have is finding an ongoing reason for the existence of the Trust, - most family trusts are set up to safe guard assets for future generations,

If you are wanting it as a vehicle to pool resources it might be more difficult.... But you might not even need one,

Property can be owned by multiple people and banks can and will take into account the income from more than one of the owners

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mdf

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#2616395 4-Dec-2020 16:22

Trusts are pretty flexible vehicles and can be set up lots of different ways. There is a (relatively) new Trusts Act 2019 that has changed some of the rules; there are a few new factors to take in to account. There are also lots of implications for relationship property, gifting and rest home subsidies, and creditor interests. So absolutely getting advice from an experienced lawyer or account is appropriate.

Trusts have settlors (the person(s) creating the trust or providing the property), trustees (the legal owners of the property) and beneficiaries (the persons for whom the property is held in trust). For a family trust, you may be some or all of these people and you need to be clear in what role you are acting at any given time.

Suppose the settlor (probably you) transfers the ownership of your house to the trustees but the house still has a mortgage. Banks will lend on the basis of creditworthiness. A trust (actually the trustees legally but just for simplicity) that has no income is unlikely to get a mortgage. A settlor that has income but no asset (since the house is owned by the trust) is also unlikely to get a mortgage. One approach I have therefore seen is that the settlor has the mortgage, the trust (with all the assets) guarantees the mortgage, and in return for the settlor paying the mortgage and general upkeep of the house, the trust allows the settlor to live there.

Care and professional advice is absolutely required. There are likely ongoing administrative and professional fees. You may have to disclose quite a bit of information to beneficiaries. There are perfectly valid reasons for having a trust (I do). However, you should decide whether the additional expense and hassle is worth the benefits in your particular circumstances.

BlinkyBill

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#2616407 4-Dec-2020 17:22

MDF mentions a very important point - the trust laws in NZ are about to change, from memory Jan 2021. There are new compliance requirements that the trustee’s will need to satisfy, at extra costs. And beneficiary’s need to be fully informed as to the benefits now, which may not always have even the case.

According to trust expert Martin Hawes, whose book ‘Family Trusts’ has / is being updated to reflect the new legislation, many many Trusts will wind up as the compliance costs increase a fair bit, and Govt agencies will go after Trusts set up for purposes other than to provide for the benefit of beneficiary’s (evade tax, hide assets from creditors etc).

In respect of #3, my ill-informed opinion is that unless the trustee has some duty of care over the beneficiary, as a full-time caregiver or similar, they would not be able to live at the property owned by the trust. Trusts are established for beneficiary’s, not trustee’s - and the new legislation is tightening up on this.

So it is very important to get independent advice.

Geektastic

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#2617139 6-Dec-2020 21:54

Not that I’m recommending anything, but companies can own property as well and the shares can be split as you wish.

I wouldn’t want to comment on the advantages or otherwise of one structure over another as it will be highly dependent on your personal circumstances.

I’m a trustee of our family trust and the chairman of trustees for a charitable trust, so from that experience I can say that there MAY be advantages to you and you should definitely discuss it with a good solicitor and/or accountant.

There are overheads and compliance issues to consider as well.

mentalinc

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#2617141 6-Dec-2020 22:02

Suggest to go see a trust lawyer who is able to clearly explain the impacts of all the recent changes about to come into effect and how that will benefit/impact your planned use of a trust and not seek advice online for what is an expensive and costly ongoing process to establish and maintain.

Also note, there are now talks of moving the trust tax rate up to 39% (which may happen early in the new year to come into effect 1 April 2021. So consider how that change if enacted would also impact your planned use of a trust.

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