Find out why using Trust to own investment property – Introduction
By law, a trust is a relationship under which the trustee of the trust looks after the trust’s assets for the benefit of the beneficiaries.
If it is set up properly, a discretionary trust may offer reasonably effective asset protection as the beneficiaries of the trust are generally not entitled to the income and/or capital of the trust, until the trustee makes a resolution to distribute the income and/or capital.
Therefore, if the investor is sued for whatever reason, but has used a properly established discretionary trust to buy a property, creditors of the beneficiaries do not generally have any recourse against the assets held by the trustee. This is because the beneficiaries do not really own these assets – the trust owns the assets. An exception to this principle is in relation to Family Court matters.
While a unit trust may not be as powerful an asset protection vehicle as a discretionary trust, it may still afford a level of asset protection, depending on how the units in the unit trust are held.
To that end, a unit trust may overcome some of the tax impediments associated with a discretionary trust. Multiple parties from different families can be involved in a unit trust, while retaining the general tax benefits associated with trusts. This is why a unit trust is still a popular choice of structure for property investors.