Reader question: I'm currently building my 2nd investment property which is due for completion in Feb, both properties were purchased in my name and provide great tax advantages. I plan to buy another investment property in early 2012 and I'm wondering if I should be looking towards asset protection and setting up a trust. If so what type of trust is best for property investment?
Trusts are great for asset protection but be careful. Whilst they offer great protection, there are a number of downsides to them.
Firstly, any tax losses incurred by a trust are quarantined and not able to be offset against your personal income like you are probably currently doing via negative gearing. A fancy trust structure may not be worthwhile in this instance.
Secondly, you may need to ask yourself what you need protection for. Are you a high-profile businessman that is likely to be sued at any time or are you simply an employee who is developing a list of assets? I have found too many people get caught up with wanting to have a trust because they sound sexy and exotic. If you genuinely at high-risk of losing your personal assets then I would suggest that you talk with a solicitor who will be able to tailor the correct investment vehicle for you.
Thirdly, a trust can be set-up that will offer better protection than Barrack Obama’s personal bodyguards, but you will probably have to spend thousands of dollars on its establishment and subsequent annual maintenance (via tax return and accounts). This may be pointless if you are not genuinely at risk of losing your assets. Any protection benefits can be diminished pretty quickly thanks to legal and accounting costs. Sometimes a good insurance policy is just as important.
Finally, I have seen situations were assets held in a trust were deemed to be personal assets of the individual purely due to having “control” of the trust because they wore all hats as appointor, trustee and main beneficiary.
This article first appeared in the January 2012 issue of Your Investment Property Magazine www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2012.