Benefitting from trust

How a property is best owned depends on the reasons you're buying it, and on your personal and financial circumstances.

Trusts Trusts are used to protect assets for individuals and their families into the future. The concept has been around for centuries. Trusts are most commonly created by a deed, which contains the trust's terms.

A trust is a fiduciary relationship, not an entity in its own right, meaning it can't itself own a property. So the trustees hold titles to properties in their own names but must manage those assets for the good of the trust's beneficiaries. The law requires that trust property must be kept separate from the trustees' own property.

The benefits of transferring assets from individual to trust ownership include keeping them safe from creditors or asset testing.

If you own a rental property should it be transferred into a family trust?

This will depend on what you wish to achieve with your family trust and asset protection plan. If it's an asset you wish to preserve for the future it may be a good idea.

However, there are disadvantages. If it's a rental property that has increased in value over a number of years, you could be liable for tax on previously claimed depreciation. This is because in transferring it to your trust you are effectively selling the property. So if the sale price exceeds the book value of the property, the IRD will want some of that depreciation back.

If a rental property is making a loss, a trust may also not be the most efficient vehicle from a tax perspective. Whereas as an individual you can claim losses on the property against your own taxable income, a trust can't pass losses on to individuals for tax purposes. However, rental losses can be offset against other trust income - for example interest or dividends. Any losses incurred are carried forward and offset against future trust income.

LAQCs An ordinary company is one that is owned by shareholders who are entitled to receive dividends, and surplus assets when the company is wound up. However, they are not entitled to a deduction in their own tax returns for the company's losses.

A Loss Attributing Qualifying Company or LAQC, on the other hand, gets the benefits of a company structure while also receiving some of the tax attributes of a partnership. An LAQC passes on any losses it makes to its shareholders (in the same proportion as their shareholding), and they can offset these losses against any other income they may have.

Why do people use LAQCs and when are they appropriate?

People often use LAQCs as a vehicle for owning rental properties when the property investment is likely to make a loss in the short term. Under an ordinary company structure, losses can only be offset against future profits - so if a company makes a loss of $10,000, it has to wait until it makes a $10,000 profit before it gets a tax break. Many rental properties won't make a profit for some years, so by using the LAQC structure investors can get the tax advantage now by claiming against their personal income.

Another benefit of LAQC ownership is that if you want to, at a later stage, put the property into a family trust as part of your asset protection plan, you can do this by transferring ownership of the LAQC shares to the trust. This way you won't trigger any depreciation recovery, because it is the LAQC shares that are sold to the trust - not the property itself. You should, however, always seek professional advice on this, because transferring of shares will affect among other things the company's LAQC status.

You should also get advice on whether the costs of setting up an LAQC will make it worth your while. Establishment costs for an LAQC start at around $400, and annual fees from around $500.

If you plan to make a living from buying and selling properties, should this be done through a trust?

In this scenario a structure called a trading trust is often used, to ensure that the trading activity does not taint the way other personal or investment assets are taxed. One of the benefits of a trading trust structure is the flexibility it offers in regard to the distribution of funds. However, Inland Revenue looks carefully at trading trust structures, so get good professional advice before considering this as an option.For more information contact Trustees Executors on 0800 Trustees (0800 878 783), or email enquiries@trustees.co.nz

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