Trust & Company Home Loans
Trust & Company Home Loans
Trust and company home loans are often utilised as part of an asset protection strategy but can be used for other reasons and provide other benefits as well. In this section we discuss these structures briefly, some of the reasons they are used and some of the common mistakes to avoid in arranging your finance. It is not possible to discuss all aspects in a brief summary and we are not financial advisors or accountants but after a number of years assisting customers in these areas this is our understanding of these matters. You should seek appropriate legal and financial advice before you consider borrowing in a company or trust structure.
Company Borrower Home Loans
A company borrower home loan will be used where a company will be the owner of the property and the borrower on the home loan. In addition to the company being liable to repay the home loan a personal guarantee will be required from all directors and all major shareholders of the company. It is important to note that the guarantors will be joint and severely liable so if there are multiple directors then the bank can hold any of the directors responsible for the entire debt.
This is different to the situation where a property may be owned in a personal name but it is being used as security for a company to borrow money. I.E. The purpose of the loan is to provide working capital for a business as opposed to a home loan where a property is owned by the business.
Some lenders will not offer home loans to a company at all or the loan may need to be approved in a business lending area and can attract higher interest rates and fees. It is essential to get the right advice upfront as a lot of lenders will not offer these structures or will have a number of restrictions. This can involve higher fees, higher interest rates or loss of certain features such as offset accounts.
Trust Borrower Home Loans
A Trust structure can offer unique tax benefits as well as asset protection. The most commonly used structure for an individual or a family is a discretionary trust, sometimes called a discretionary family trust. A typical trust structure is illustrated and explained further below.
Jones Family Trust
Jones Family Pty Ltd (as Trustee for the Jones Family Trust)
Chris & Lisa Jones (as Director and Shareholder)
Chris Jones & Lisa Jones as beneficiaries (Husband and Wife) Matthew Jones & Rebecca Jones as beneficiaries (Children of Chris & Lisa)
Trust Structure Explained
A trust is essentially an arrangement that allows a person or company (the trustee) to hold the assets on behalf of another person, family or group of people (the beneficiaries). In this case the company Jones Family pty ltd (the trustee) holds the asset on behalf of the members of the jones family (the beneficiaries). Assets held through the trust are not legally owned by the beneficiaries which means in this example that other creditors to Chris and Lisa Jones will not be able to go after assets held via this trust structure as they are not legally owned by Chris and Lisa.
If Chris or Lisa was in a particular industry or profession that was exposed to legal risk or they were exposed to certain risk in other investments such as large debt on a property development project, then this structure could minimise their exposure to these risks. It could allow them to acquire property assets they control directly and they can receive the benefit from the assets such as the rental income but without exposing these assets.
Another benefit with a trust structure is that income from an asset held in this structure can be distributed on a discretionary basis. That means that all the income could be sent to one family member if for example that family member had the lowest income in that particular year, however, there are significant restrictions to distributing income to children under 18.
It important to discuss your plans with a mortgage broker at an early stage. Legal and Financial Advisors can provide advice about a holistic strategy for you to acquire assets and build your wealth but they will not understand the guidelines of different lenders. Whilst these structures are common a number of lenders either will not offer home Loans in these structures or will only often loans to certain structures.
Each lender will have slightly different requirements such as who may need offer a personal guarantee so whilst your legal or financial advisor may suggest a certain trust structure for certain reasons it does mean that a lender will accommodate the structure in the way you want it. It is definitely better to get advice from a broker as soon as you can so that a lending solution can be tailored to the structure you have worked out with your accountant and financial advisor.
Units Trusts & Other Trust Structures
Another common trust structure is a unit Trust. This is different from a discretionary trust in that each unit holder has a set number of units in the trust and profit distributions must be in accordance with the unit holding. For example if you have 20% of the units you are entitled to 20% of the profit distributions. This structure is therefore better suited for a group of investors that each have a set stake in the investment where as a discretionary trust will normally be used by a family or family members.
A hybrid trust is a less common structure which combines features of both a unit trust and a discretionary trust. This structure is outside the scope of discussion here but most lenders will not allow this as a borrowing structure. If you seek to use this structure, please contact us to discuss your individual requirements. A different type of Trust structure is necessary for Self Managed Super Fund Lending (SMSF). This structure is discussed further in SMSF Lending Explained.