5 Steps To Setting Up A Family Trust To Buy Property

5 Steps To Setting Up A Family Trust To Buy Property

Purchasing an investment property is an important decision that shouldn’t be taken lightly. One major consideration is the tax implications of your investment and how this will affect you in future years. 

Setting up a family trust can be beneficial for property investors when it comes to setting up a tax-effective structure. In fact, family trust is a flexible and powerful investment vehicle.

Another major benefit of setting up a family trust for your real estate investment is that it provides asset protection and several tax benefits. 

So, in this blog post, we will explore the steps to setting up a family trust to buy property. 


Step 1: Establish Whether a Family Trust Structure is Suitable For You

Before setting up a family trust to buy property, you need to consider whether it’s the appropriate structure for you and your family. There are significant benefits associated with setting up a family trust, including estate planning and asset protection, but you’ll need to establish whether the benefits align with your current financial circumstances and future financial goals. 

Because there is a lot to consider, you should seek professional advice from an expert advisor who can help you weigh up the advantages and disadvantages and give you a fee proposal for setting up and maintaining a family trust.


Step 2: Consider the Complexities Around Obtaining a Home Loan 

While obtaining a home loan to purchase a property through a family trust is possible, it’s not an easy task. Unfortunately, this is because banks and other lenders perceive discretionary trust structures to be a higher risk due to the complex legal framework in which they operate.


Step 3: Set Up a Family Discretionary Trust 

If, after weighing up all your options, you decide to set up a family trust to buy a property, you need to: 

  • Appoint a trustee
  • Identify the trust beneficiaries
  • Establish a family trust deed
  • Convene a trustee meeting 
  • Lodge the trust deed to get it stamped by state revenue
  • Apply for an Australian Business Number and Tax File Number 
  • Open a bank account for the trust

If you would like to know more about what each step entails during the set-up process, including drafting a trust deed, make sure to check out these nine steps on how to set up a family trust


Step 4: Purchase Your Investment Property 

Once you’ve set up your discretionary trust and established an investment strategy, you can start looking to purchase a property. 

The process is essentially the same as buying a property outside of a trust, but the trustee must sign all the documentation because they become the legal owner of the property. 

So, because a trust is a legal arrangement between a trustee and the beneficiaries (not a legal entity), it’s the trustee (in their capacity as trustee) who borrows money, not the trust. As discussed earlier, engaging a mortgage broker is essential for this part of the buying process because trust loans are a little more complex. 

It’s also worth noting that in some States and Territories, including NSW and Victoria, property investments owned by a trust don’t qualify for the land tax-free threshold. 

Once you know how much you can afford and receive pre-approval for a home loan, you can start looking for investment properties. The property you decide to buy will be entirely dependent on your budget and your investment goals. Here’s where consulting a property expert can benefit you. 

At Property Tax specialists, we’ll get to know you, develop strategies and select an ownership structure that considers your personal objectives, business, investments, income, family, and lifestyle goals. 


Step 5: Trustee Makes Distributions 

Before the end of the financial year (i.e. 30 June), each year, the trustee (or trustees) must establish how they are going to distribute the investment income generated from the property. 

A significant benefit that makes discretionary trusts particularly attractive to Australian property investors is that the trustee has the discretion to divide the taxable income between the beneficiaries in the most tax-effective way each financial year. 

For example, the trustee can distribute more income to beneficiaries who pay lower marginal tax rates. By dividing the income tax allocation, the trustee can legally minimise each beneficiary’s general tax obligation. 

But, if the trustee does not distribute the income generated from the investment property by 30 June, the profits will be taxed at the highest marginal tax rate.


Key Takeaways

Joining the property market can be daunting. For many investors, one way to mitigate the potential risks of property investment is to establish a family trust. A family trust is a legal arrangement where the trustees manage trust assets on behalf of the trust beneficiaries (who benefit from the trust income).

This can be done to protect assets, plan how your estate will devolve, and legally minimise tax. 

However, setting up a family trust to buy investment properties is no small feat. Discretionary trusts operate under a complex legal framework, and there are several compliance requirements. Therefore, it’s important to have a team of financial advisors, brokers, property agents, and tax experts to help you navigate the process. 

At Property Tax Specialists, we understand that investing in property to build wealth includes navigating complex tax laws and reporting requirements to ensure you get the best financial outcomes. Our experienced advisors and tax agents have enhanced knowledge and understanding of property and tax, enabling them to provide you with expert taxation advice, including structuring the ownership of your property portfolios. 

If you would like to find out how we can help you with your trust property investments, get in touch today. 


DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation, or needs. 


Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002

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