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Beginning property investors are often so absorbed with finding properties that will deliver good capital growth and/or positive cash flow that they forget the very important matter of protecting those assets.
Protecting your wealth is no less important than building it.
The term ‘structures’ refers to – among other things – the way you choose to hold title to your property(ies). Most investors choose to buy under their own name – it’s the least expensive and least complicated method, however, it can leave your assets open to risk.
The following strategies vary according to your particular situation so it’s vital that you seek out professional help in setting up your structures to make sure that you choose those that are right for you.
Following is an overview of the means that investors can use to protect their investments as they build their future.
- Individual’s Name
Debt restructuring, asset protection and succession planning options and strategies will be impacted by your choice of structure, so that’s why it’s vital to get it right from the start.
It’s also less costly if you don’t have to change your ownership structure mid-stream.
This is the most common means of ownership. The benefits and drawbacks apply whether the property is held solely or jointly.
- Easy and inexpensive to set up and to manage because capital gains and rental income are included in the investor’s personal tax returns.
- Paperwork is less involved than other types of structures.
- Tax effective, especially if the property is negatively geared.
- Assets at risk – no protection from creditors.
- Shift from negative gearing to positive gearing over time adds to the individual’s tax liability.
- Simple structure that’s not too expensive to get set up.
- Tax is not paid, however income must be distributed to the partners.
- Is taxed as its own entity, requiring a separate tax identification number and must be filed separately.
- Limited flexibility to distribute income as it must be split as determined in the partnership agreement.
- As with individual ownership you don’t have protection against claims.
- If claims are made against one partner, all of the assets of the partnership are at risk as all partners are liable both jointly and severally, meaning one partner could be liable personally for all of the partnership’s debts.
- Tax rate is 30% on profits.
- If the business is sued or fails, shareholders have some protection from loss.
- Losses must be offset against future income.
- Setup costs can be high.
- Accounting and tax preparation costs.
- Dividends on a profit can be paid to investors, but restrictions limit the flexibility of payments.
A discretionary or family trust can help protect your assets from creditors’ claims and save money on taxes.
There are 5 main types of trusts:
- Superannuation funds
- Testamentary trust
The term “discretionary” in reference to a trust involves the powers that the trustee has in deciding which beneficiary(ies) receive the net income from the trust either annually or at one time, depending upon the terms of the trust.
The most common type of discretionary trust used is the Family Trust. This kind of trust will have a trustee (which is usually a shell company) which holds the asset(s) in trust for the benefit of the family members (beneficiaries).
In a unit trust, the beneficiaries’ rights to income and capital in the trust are fixed. In other words, a trustee is required to manage the trust according to the terms therein rather than by his discretion as in a discretionary trust.
The beneficiaries in this kind of a trust are known as “unit holders.” Each unit holder has a fixed interest in the trust. There may be differences in voting rights, income and capital distribution rights.
As you might imagine, a hybrid trust takes best of both worlds (unit trust and a discretionary trust) and combines them to create a powerful and flexible tax planning vehicle.
A testamentary trust is one that manages your affairs after you’ve passed on.
In addition to the typical home insurances you’ll want to have processes in place that will protect your assets in the event of your inability to provide income for yourself and/or your family.