Due to their asset protection and tax benefits, many borrowers use trusts to purchase their investment properties.
As part of the “trust” loan application process, lenders look for:
- The type of trust: Certain lenders may favour discretionary or family trusts, while others may prefer hybrid trusts, property investor trusts, and SMSFs.
- The trust credit file: Lenders may examine the trust’s credit file to determine whether it has applied to other lenders and whether there are any red flags.
- The trust deed: The trust deed confirms the identity of the beneficiaries and the trustee.
In most cases, the deed will be checked by lenders to ensure the trustee has the power to apply for loans.
What is a discretionary trust?
Discretionary trusts are types of trusts in which beneficiaries do not have a fixed interest.
A discretionary trust will normally allow the trustee to remove existing beneficiaries or appoint additional beneficiaries. Such authority enables the trustee to select which beneficiaries are to receive the trust funds i.e., income and/or capital and how much each beneficiary is entitled to receive. However, the trustee must still comply with the terms in the trust deed and any restrictions imposed when doing so.
What is a family trust?
A family discretionary trust is a type of discretionary trust that belongs to all members of the same family, which is why they are often referred to as family discretionary trusts.
Just like with a discretionary trust, the trustee can distribute income to various family members, as they see fit.
A unit trust, on the other hand, is one in which the trustee has no discretion, and the trust funds are distributed according to the allotted units each beneficiary receives.
What is a unit trust?
As referenced above, a unit trust is different from a discretionary trust in that its income is distributed by the trustee according to units issued by the trust.
Unit holders receive distributions based on the proportion of units they own in the trust. So, in effect, the unit holders are the beneficiaries of the trust.
Trust terms explained
There are many parties involved in a trust, each with a distinct role. Here are some of the most important trust terms:
- Trustee: Is legally responsible for the trust but does not have any beneficial interest in the trust. It is the trustee’s duty to act in the best interests of the beneficiaries and not abuse trust funds. It is the trustee’s responsibility to choose the beneficiaries and to determine what assets and income they will receive.
- Appointor: Appoints the trustee of the trust and has the power to remove them.
- Beneficiaries: Persons who will benefit from the trust and receive the income and assets as stipulated by the trust deed.
When you apply for a loan on behalf of a trust, lenders will require several documents from you. Some of these documents include:
- A certified copy of the stamped trust deed.
- A certified copy of the company constitution OR the trustee’s A.C.N details.
- Identification for all trustees, directors of trustees and beneficiaries of the trust.
- Tax returns & financial statements for the trust & beneficiaries of the trust.
- Tax returns & notice of assessment for the beneficiaries of the trust.
Now it is also possible to also apply for a trust loan without the standard documents.
So, for those who are interested in purchasing a property via a trust, whether it is a standard trust or something unique to your transaction, please contact us first to learn how we can help you achieve your desired outcome.
Eddie Leon @ 0499 600 789 or via email eddie@thebetterbroker.com.au