When buying property in Victoria, most people purchase in their own name. However, there are situations where it may be beneficial to purchase property through a trust structure. Understanding these structures can also be an important part of property conveyancing in Victoria.
One option is a bare trust, which involves a bare trustee holding the legal title to a property on behalf of someone else. While this arrangement can offer advantages in certain circumstances, it is important to understand how it works before deciding whether it is right for you.
What Is a Bare Trustee?
A bare trustee is a person or company that holds legal ownership of a property for the benefit of another person or entity, known as the beneficial owner.
Although the trustee’s name appears on the title, they do not actually enjoy the benefits of owning the property. Their role is largely administrative, and they act according to the instructions of the beneficial owner.
The beneficial owner is the person who receives the real benefits of ownership, including:
- rental income;
- capital growth;
- sale proceeds; and
- certain tax benefits, where applicable.
In simple terms, the trustee holds the property, while the beneficial owner enjoys the benefits that come with it.
How Is a Bare Trust Created?
Before a property can be held by a bare trustee, a bare trust deed must be prepared.
A trust deed is a legal document that creates the trust and sets out the rights and responsibilities of everyone involved. It identifies:
- the trustee;
- the beneficial owner;
- the property being held; and
- the terms of the arrangement.
Because the trust deed forms the foundation of the arrangement, it is important that it is properly prepared and tailored to the parties’ circumstances.
Why Do People Use Bare Trusts?
There are several reasons why someone may choose to purchase property through a bare trust.
Tax Planning
In some situations, a bare trust may form part of a broader tax planning strategy.
Depending on the circumstances, the beneficial owner may be treated as the owner of the property for taxation purposes. However, taxation outcomes can vary, and professional legal and accounting advice should always be obtained before establishing a trust structure.
Estate Planning
Bare trusts can also be useful for estate planning purposes.
For example, a parent may purchase property for a child who is not yet old enough to be registered as the owner of the property. The trustee can hold the property until the child reaches the appropriate age.
Trust structures may also assist with broader succession planning objectives and the transfer of wealth between generations.
SMSF Property Purchases
Bare trusts are commonly used when purchasing property through a self-managed superannuation fund (SMSF).
In many SMSF borrowing arrangements, a separate trustee company holds the legal title to the property while the SMSF remains the beneficial owner.
These transactions involve strict legal and regulatory requirements, making specialist advice particularly important.
What Are the Potential Disadvantages?
Like any ownership structure, a bare trust is not suitable for everyone.
Limited Asset Protection
Many people assume that placing property in a trust automatically protects it from creditors. This is not always the case.
Because the beneficial owner retains the beneficial interest in the property, that interest may still be available to creditors in certain circumstances.
If asset protection is a key objective, other trust structures may be more appropriate depending on your situation.
Additional Costs
Establishing a bare trust generally involves additional legal and administrative costs.
These may include:
- preparing the trust deed;
- establishing a corporate trustee;
- ongoing accounting or compliance costs; and
- additional documentation required by lenders.
Before proceeding, it is important to consider whether the benefits of the structure outweigh the additional costs involved.
Lending Requirements
Some lenders have specific requirements when lending to trusts.
This can sometimes result in additional paperwork or a more detailed approval process. Obtaining advice early can help ensure the structure aligns with your financing arrangements.
How W Legal Group Can Help
At W Legal Group, we regularly assist clients purchasing property through a range of ownership structures, including:
- bare trusts;
- family trusts;
- companies; and
- self-managed superannuation funds.
Every purchaser’s circumstances are different, and there is no one-size-fits-all approach. Our property lawyers can help you understand the advantages and risks of each structure and determine which option best aligns with your goals.
Contact our conveyancing lawyers in Melbourne at hello@wlegalgroup.com.au to discuss your upcoming purchase.
