Six lessons from Gina Rinehart and the importance of using the right kind of trusts

Recently Gina Rinehart's problems with her children have been front page news across the nation.

There have been a few lessons from this saga that we can all learn from.

The main points are summarised below:

You may recall that her family trust had a vesting date that triggered a capital gains tax of $100 million per beneficiary. Most if not all trust deeds have an 80-year vesting date, which means that the trust deed ceases to exist at this point and all assets than pass to the beneficiaries, triggering stamp duties and capital gains tax.

The problem with this is where normally a person sells a property to than have the cash to pay the tax, when a trust "vests" the beneficiaries end up with a huge tax liability but no cash to pay for it.

Hence he or she is forced to sell the property to pay the tax – but what if he or she wants to hold onto it?

Then the beneficiary would need to find cash elsewhere to fund the tax. Or he or she could borrow from the bank (assuming he or she can secure a loan) with the property as security.

In either case it's not an ideal situation to be in.

You may say that 80 years is a long time and you won't be around to worry about it, but you will leave a huge problem for your children and grandchildren.

In Gina's situation this could potentially send the children into bankruptcy as they will have a $100 million tax bill each (as reported) without either the asset or the cash to pay the tax. Not a good position to be in.

Lesson 1:

Make sure that your trust deed does not have a vesting date. The Chan & Naylor "Property Investors Trust" deed is one such trust deed that does not have a vesting date.

It also has an approved product ruling from the ATO and allows the negative gearing to be claimed against your salary and protects the property from litigation and at the same time keeps it within the family bloodline and away from the childrens’ in-laws in case of a marriage breakup.

Lesson 2:

Make sure you retain control of the money by remaining as trustee. The trustee has full control over the assets. You may recall Gina's children attempted to remove her as trustee. With control you can still distribute funds to them but at your discretion.

Lesson 3:

Make sure you retain the position of appointor. The appointor has the power to remove and appoint a new trustee. The appointor is the most powerful person in the trust. In most husband and wife situations, they hold the appointor position jointly.

Lesson 4:

With marriage break-ups at an all-time high (above 30% and higher because many unwed people live together and their break-ups are not recorded as marriage break-ups).

Do not pass any assets across to the children until after one partner dies. You can still lend children money but register a mortgage or caveat over the property or assets. You can call those funds back in case their marriage breaks up.

Lesson 5:

Property that you hold can still be provided as security for a bank to lend money to your children to purchase their homes with. The bank will hold their home as the main security (80%) and should something go wrong than you are only exposed to 20% being the top-up security held on your property. You can safeguard this with a second mortgage over their property.

Lesson 6:

Never hold investment properties in your own name but in a property investors trust (PIT), because at your discretion you can still distribute rental income to them from the PIT. You can still put the property up as security for a loan from the bank for them and when you are ready to pass control and ownership to them the title on the property can be changed (i.e., trustee can be changed) with no stamp duty or capital gains tax.

If you held the property in your own name and attempted to transfer the title to your children (before your death) there will be stamp duty and capital gains tax to pay.

The problems experienced by Gina Rinehart and her children are not problems that you only find in the rich.  They are experienced by everyday people who have assets such as property. The only difference is that problems of the rich get published in newspapers.

Most importantly, make sure you get good advice before you do anything. It's very expensive to try and fix something after the event.

As my mother would say, "An ounce of prevention is better than a pound of cure".

Ed Chan is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.