How to Make Sure That You Set up Your Family's Estate Correctly When Making a Major Purchase
A family unit should always aim to be as cohesive as possible. This applies to everyday life and planning, but it should also apply to estate affairs when the breadwinners pass away. While this can be a difficult situation to address, it's nevertheless important for the whole family to consider how any major purchases could affect them all in such a situation. When buying an investment property, therefore, how should you proceed?
Getting It Right
There are many reasons why a family needs to look at legal matters when buying an investment property, so that they avoid any problems with taxation and other family law issues. However, they should ensure that the property survives the death of the primary member by creating the right type of legal vehicle at the beginning.
Essentially, there are three common alternatives and these include individual ownership, a corporation or a family trust.
An "individual" estate can be set up as a single entity or as a joint operation and the latter is usually chosen when a married couple purchases a property. Everything is shared equally including income, losses or capital gains.
Some will approach this from a "negative gearing" perspective, but care should be taken to ensure which income earner should be named as the owner of the property, in order to maximise tax deduction benefits. It is also possible to apportion ownership between family members, using an approach known as "tenants in common." In this way, all financial affairs are shared proportionally between the co-owners.
Establishing a Corporation
You could opt to set up a corporation in order to own and manage the property, although this entity is not eligible to receive any capital gains discounts from the taxman. Any profits will incur taxes for each of the shareholders and the solution could create issues should one of the shareholders divorce from the other, for example.
Setting up a Trust
A popular approach is to create a family trust, where a trustee distributes net income to each of the beneficiaries on an annual basis and they subsequently pay tax on their earnings. There are three different types of trust including testamentary, fixed and discretionary and each one attracts different tax implications with regard to capital gains and income.
If you are unsure about your approach, then it's best if you talk with an expert, as some of these solutions can be rather complicated to set up and administer.