FAQ 12 How do I fund a trust – Gift or Loan

Firstly it must be understood that there is no right or wrong answer to this question. Is is a question that only you as the investor can answer. You will have a choice to make.

One choice will provide Asset Protection but will impose a financial burden, the other choice will provide no asset protection but will impose no financial burden. Your lawyer, account etc cannot provide an answer to this question. They can only lay out the circumstances for each case.

Here are the ways to fund. NOTE THAT THE LOC SHOULD BE FOR INVESTMENT PURPOSES ONLY. DO NOT MIX PERSONAL AND INVESTMENT SPENDING WITHIN THIS LOC.

a)Loan directly to the investment trust
An unsecured loan agreement is drawn up between the party lending the funds and the trustee of the trust. The trust pays interest on that loan to the lending party as per the terms of your loan agreement . The trust keeps records of the interest paid to the party and claims the interest paid as an expense. The lending party declares the interest paid to to it as income, however the lending party will claim tax relief on the interest expense that It pays on the drawn down portion of it\’s LOC.( if the funds are sourced from a LOC)

If the interest rates charged and paid are the same then the lending party will have no net gain (hence no cost to the lending party ) . This is the best senario as the sums claimed by the trust will be the same as the amount paid by the lending party. The downside is that the amount loaned remains the asset of the lending party If the lending party  were personally sued then this sum could be recovered from the borrowing party ( the trust )

Ie NO ASSET PROTECTION. & NO FINANCIAL BURDEN

Note that loan agreement documents can be drawn up by a lawyer or obtained from your accountant.

b)Loan to the investment trust via a Piggy Bank Trust
An unsecured loan agreement is drawn up between the party lending the funds and the trustee of the piggy bank trust. The PBT trust then on lends to the Investment Trust. Interest is paid by the PBT to the individual and in turn interest is also paid by the investment trust to the PBTas per the terms of the various loan agreements . Both trusts keeps records of the interest paid and claims the interest paid as an expense. The lending party declares the interest paid to to it as income, however the lending party will claim tax relief on the interest expense that It pays on the drawn down portion of it\’s LOC.( if the funds are sourced from a LOC)

If the interest rates charged and paid are the same then the lending party will have no net gain (hence no cost to the lending party ) . This is the best senario as the sums claimed by the trust will be the same as the amount paid by the lending party. The downside is that the amount loaned remains the asset of the lending party If the lending party  were personally sued then this sum could be recovered from the borrowing party ( the trust )

Ie NO ASSET PROTECTION. & NO FINANCIAL BURDEN

Note that loan agreement documents can be drawn up by a lawyer or obtained from your accountant.

c) Gift to the PBT trust
The gifting party simply gifts the money to the PBT trust. No loan agreement is required, however we would minute the acceptance of the gift and have a deed of gift drawn up. The minute would be held in the trustee file.
Now for the downside. The gifting party will end up paying the interest on the LOC which cannot be claimed against tax. Because the trust effectively borrows less money it is likely that it will make a profit. This profit will have to be distributed each year. If the gifting party received a distribution from the trust as a beneficiary then it would also pay tax on this too.
The upside is (after the clawback period) that the gifted sum is protected against personal litigation. The PBT would then use its gift of funds to on loan to future investment trusts

Ie ASSET PROTECTION. & FINANCIAL BURDEN

Note that loan agreement documents can be drawn up by a lawyer or obtained from your accountant.

The choice is a personal one to make – which is more important?

Michael & Sara
Ultimate Coaches

The information supplied is general only and not intended to replace professional advice. As coaches we do not provide advice on what or where to buy or to assess the suitability of a property. We advise students to perform their own due diligence when considering a property purchase.