What you need to know about Trusts when buying or selling property in Queensland

Table of Content

Advantages of Buying in a Trust Entity
Financing Options for Property Acquisition through a Trust
Types of Trust Accounts in Queensland
Living Trust vs. Testamentary Trust
Revocable Trust vs. Irrevocable Trust
For What Purposes Could the Trusts be Created?
Requirements for Real Estate Trust Accounts in Queensland
How to Establish a Trust in Queensland
Land Tax Thresholds and Rates for Companies and Trusts in Queensland
How can a Solicitor Help with Trusts and Estates?

Advantages of Buying in a Trust Entity

• Tax Benefits: A trust, equipped with its own tax file number, must file a tax return. However, if the trustee allocates all income generated from an investment property to the trust’s beneficiaries, it becomes part of their individual income. This distribution, considering varying tax brackets, can yield significant tax savings compared to individual property ownership.
• Asset Protection: In a trust, the trustee is the rightful owner of all assets. This ownership structure shields an investment property from potential creditors or legal actions against a beneficiary. This serves as a substantial advantage in protecting assets within a trust.
• Profit Distribution: Trusts simplify the equitable distribution of income from investment properties, as trustees are legally bound to act in the best interests of beneficiaries. Unit trusts, in particular, define entitled amounts for each beneficiary based on their unit ownership, preventing unequal income distribution in joint ventures.
• Estate Planning: Trusts provide a straightforward mechanism for transferring property ownership in situations of illness, disability, or death. The trust deed outlines procedures for such circumstances, averting potential legal complications, especially within families. Additionally, in certain cases, property transfers within a trust upon an individual’s death may be exempt from specific taxes and government expenses.

Financing Options for Property Acquisition through a Trust

Securing a loan for purchasing an investment property through a trust is a viable but challenging endeavor. Lenders perceive trusts as higher risk due to their intricate legal structures. The complexity of these frameworks makes it more challenging for lenders to reclaim the property in the event of a trust default, given the protective measures trusts offer.

Consequently, some lenders outright refuse to extend loans to trusts, while others evaluate applications on a case-by-case basis. Lenders scrutinize the type of trust applying, the credit histories of all trust members, and the trust itself. In some cases, lenders may insist that all beneficiaries act as guarantors on the loan. Additionally, a thorough examination of the trust deed is conducted to ascertain the trust’s purpose and whether the trustee possesses the authority to apply for a loan, given that the loan is in their name.

Due to the intricacies associated with trusts, many lenders opt to process applications through their business banking channels. This approach often translates to higher interest rates, increased fees, and a lengthier application processing period.

Types of Trust Accounts in Queensland

There are many types of trust categorization. In total, trusts can be divided according to four criteria:

1. Whether the trust is created during the life of the grantor or after his death.
2. Who is the trust manager (real estate agent, solicitor, collector, etc.).
3. Is it possible or not to change the terms of the trust.
4. For what purpose is the trust created (Charitable trusts, Family trusts, Funeral Trusts etc).

As is clear from the list above, these criteria may overlap. Therefore, we will move from a general typology to more specific examples of trusts.

Living Trust vs. Testamentary Trust:

• Living Trust (Inter Vivos Trust): Created while the grantor (the individual establishing the trust) is alive. Also known as an inter vivos trust.
• Testamentary Trust: Established posthumously, in accordance with the grantor’s last will and testament. Allows for alterations to its terms before the grantor’s passing, as specified in the will.

Revocable Trust vs. Irrevocable Trust:

• Revocable Trust: A living trust formed during the grantor’s lifetime. Named for its flexibility, enabling the alteration of terms while the grantor is alive.
• Irrevocable Trust: The terms of this trust cannot be changed or revoked by the grantor once established.

For What Purposes Could the Trusts be Created?

The diverse array of trusts serves specific purposes, offering tailored solutions for estate planning. Understanding their distinctions is crucial in selecting the most suitable trust for individual needs.

• Family Trusts: A form of Bypass Trust ensuring effective wealth management, protection, and transfer across generations.
• Funeral Trusts: Set aside funds covering burial and funeral expenses, often managed by funeral homes.
• Asset Protection Trusts: Legally binding trusts safeguarding assets from potential creditors or legal claims. Irrevocable asset protection trusts, established in creditor-friendly jurisdictions, facilitate the transfer of assets to shield them from legal ownership.
• Land Trusts: Transfers real property ownership to a legal entity for beneficiary benefit, ensuring anonymity, protection, and probate avoidance.
• Life Insurance Trusts: Irrevocable trusts managing life insurance policies to keep proceeds outside the taxable estate.
• Charitable Trusts: Irrevocable trusts benefiting the grantor, beneficiaries, and a qualified charitable organization. Types include Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs).
• AB Trusts (Marital Trusts): Designed for married couples to optimize estate tax exemptions. Post the first spouse’s demise, the trust divides into “A” (survivor’s trust) and “B” (bypass trust) portions, ensuring efficient use of individual estate tax exemptions.
• Blind Trusts: Financial arrangements where independent trustees manage assets without owner influence. Commonly employed by politicians and public figures to prevent conflicts of interest.
• Bypass Trusts (Credit Shelter Trusts): Irrevocable trusts strategically minimizing estate tax for couples. Protects assets for beneficiaries while providing for the surviving spouse.
• Constructive Trusts: Legal remedy correcting unjust enrichment by imposing trust through court intervention.
• Discretionary Trusts: Estate planning tools granting trustees discretion over asset and income distribution to beneficiaries.
• Crummey Trusts: Irrevocable trusts preserving the lifetime gift tax exemption by granting beneficiaries short-term withdrawal rights.
• Dynasty Trusts: Irrevocable trusts transferring wealth across generations, evading estate and generation-skipping transfer taxes.
• Generation-Skipping Trusts: Transfers assets to a beneficiary two or more generations younger than the grantor, subject to Generation-Skipping Transfer Tax.
• Qualified Personal Residence Trusts (QPRT): Irrevocable trusts allowing the transfer of a primary residence, with the grantor retaining residence rights for a specified period.
• Grantor Retained Annuity Trusts (GRAT): Irrevocable trusts minimizing taxes on significant gifts, providing annuity payments to the grantor for a specified term.
• Qualified Terminable Interest Property Trusts (QTIP): Provides income for a surviving spouse while allowing the grantor to control assets after the first spouse’s death.
• Pet Trusts: Ensures care and financial support for pets after the owner’s death, designating caregivers and providing funds.
• Spendthrift Trusts: Shields trust assets from beneficiaries’ creditors, restricting beneficiary access to principal to prevent reckless spending.
• Special Needs Trusts: Benefits individuals with disabilities without jeopardizing eligibility for government benefits, enhancing the quality of life.
• Totten Trusts (Payable-on-Death Accounts): Informal revocable trusts where the depositor designates a beneficiary for easy transfer of accounts upon death, avoiding probate. The depositor retains control during their lifetime.

Requirements for Real Estate Trust Accounts in Queensland

The process of opening and utilizing a trust account comes with specific criteria that must be adhered to, including:

• Licensees are obligated to formally inform the deposit-taking institution in writing, specifying that the account in question is a trust account.
• If the trust account is held by a corporation, it must be registered in the name of the corporation.
• In cases where the account is not under a corporation, the trust account should be registered in the name of the licensee or the firm.
• The account name must incorporate the name of the firm, licensee, or corporation as a prefix, followed by any necessary identifier for the trust account.
• The designation “trust account” is a mandatory inclusion in both the name of the trust account and all checks drawn from the trust account. the name of the licensee

How to Establish a Trust in Queensland

Establishing trust in Queensland involves a structured process that can be undertaken either independently through online services or with professional guidance. The associated fees for setting up a trust are approximately $1500, with additional expenses for more intricate structures that entail the administration of a corporate trustee.

Here is a comprehensive guide to the key steps for initiating a trust:

1. Identify Original Trust Assets: Compile a detailed list of assets, along with their current values, slated for inclusion in the trust.
2. Appoint Trustee(s): Designate an individual or financial institution to serve as the trustee, bearing significant legal authority and control over the trust assets.
3. Determine Beneficiaries: Create an exhaustive list of individuals or entities entitled to receive benefits from the trust. Specify the percentage distribution of assets allocated to each beneficiary.
4. Draft Trust Deed: Formulate a trust deed, a legal document delineating the rules governing the trust and the powers vested in the appointed trustee. The trust deed covers objectives, original trust assets, beneficiary identification, methods for benefit distribution, termination procedures, and guidelines for operating the trust bank account. The trust deed necessitates signatures from all trustees, compliance with state or territory laws, and periodic reviews and updates by professionals with specialized legal and financial knowledge of trusts.
5. Stamping: Determine the applicability of stamp duty, a state-based tax, to the trust deed based on the state or territory. Coordinate the stamping process through the relevant revenue authority or seek assistance from legal and accounting professionals. In Queensland, stamping is not mandatory, but it may be obligatory in other states such as Victoria and New South Wales.
6. Register as a Business: Obtain an Australian Business Number (ABN), Tax File Number (TFN), and a business name for the trust. Depending on the trust’s type and complexity, registration as a company may be required.
7. Open a Bank Account: Establish a trust bank account in the name of the trustee once the trust is officially established. The bank may request personal details of the trustee(s) and other involved parties.
8. Initiate Trust Activity: Once the trust bank account is active, the trust is operational, enabling it to receive contributions or make investments in accordance with the terms outlined in the trust deed.

Land Tax Thresholds and Rates for Companies and Trusts in Queensland

Your obligation for land tax is determined by the land you own as of midnight on June 30 each year.

The land tax rates vary based on the ownership type:

• Companies, including clubs, associations, societies, or trustees (of trusts or superannuation funds) are subject to land tax if the total taxable value of all their land—comprising solely owned land and their share in jointly owned land with others—exceeds $350,000.

How can a Solicitor Help with Trusts and Estates?

Perhaps one of the tricky moments in Trusts is that there is not always a clear certainty whether you need to turn to a specialist for help or whether you can solve all the issues on your own. And most likely this article won’t be able to answer all questions about your specific case. But our GM Law team probably can. Just write to us through the Contact Us form or call 1300 185 636 and we will give you feedback regarding your specific situation. This call won’t necessarily make you our client, but 100% sure it will give you a clearer vision of what to do next.