Chris and his partner are concerned about asset protection and in particular transferring equity from a principal place of residence into a trust for investment purposes. Our expert in that area, Ken Raiss is along to help with some sound advice.
Kevin: Joining us once again to answer your questions, Ken Raiss from Chan & Naylor.
Good day, Ken. Good to have you back on the show again.
Ken: Thank you, Kevin. I hope you’re well, as well.
Kevin: I’m very well, thank you. Lots and lots of questions coming in for you, and we have one from Chris. But just before I read that, I just want to remind you once again that your questions are always welcome. You can send them in through the website, and we’ll always get an answer for you from Ken or any one of our experts.
Ken, this question, as I said, comes from Chris. Chris says, “Great podcast.” Thank you for that, Chris. We really appreciate putting it together for you. “Very informative and very motivating. My partner and I are concerned about asset protection,” as everyone should be. “What’s involved with transferring equity from a principal place of residence into a trust for investment purposes? What issues and restrictions should we be aware of?”
There’s no one better to explain that to you than Ken Raiss, my guest.
Ken, over to you.
Ken: Great question. We get this question quite a lot. One of the mistakes people make is they physically transfer the property and then trigger the capital gains tax and stamp duty. The way around those taxes is by shifting equity. It’s the same as if you had a bank account with money and you moved it from one bank to another, there’s no tax implications.
There are a number of very critical steps that you have to perform. They are both legal for tax purposes but more importantly, to meet the conditions of the Bankruptcy Act.
The first thing you need to do is understand how much equity you have, and we do this normally via a solvency statement because if you effectively transfer one dollar more than you actually have, the whole transaction is void. A solvency statement, determine the amount of equity, and then transfer that as a gift into the trust.
You then borrow that back via a mortgage. So it’s critical to have proper mortgage documents, and we always say witness those documents for proof of the date that it was done. You have to pay your mortgage stamp duty on that mortgage, particularly in New South Wales.
There is a four-year callback period that in the event of bankruptcy, a receiver can go back four years to unravel everything. But that would have also been the case if you had sold the property and paid all the taxes.
You just have to be careful as time goes by, that as the values grow, you have to re-gift and re-loan, and again, with proper mortgages and proper solvency statements, and obviously, the four years on that increase starts again every time you increase that gift and loan.
What’s very important that a lot of people miss is you also have assets in trust. The equity that you have in a trust can be at risk. If a tenant sues you, if someone sues you, your assets in the trust are normally safeguarded, but if someone inside the trust sues you, then they’re at risk, as well. We always tell people to shift the equity from personal names, companies, trusts, into what we call an equity bank trust to achieve the asset protection requirements you speak of.
Hopefully, that’s answered your questions. Just follow those points and get a good legal mind behind the preparation and execution of those documents.
Kevin: It always highlights to me every time I talk to you about trusts and what to do with them, that you really need do need some expert help. There’s no one better than Ken and his team at Chan & Naylor. Of course, they are the ones who we recommend, and Chris, I would strongly suggest, if you want to, you can use the link on Real Estate Talk to talk directly to Ken and his team.
Ken, thank you, once again, for answering that question, and I look forward to catching up again soon, mate.
Ken: Thank you very much, Kevin, and thank you, listeners.