DEBT STRUCTURE – A SUBTLE BUT IMPORTANT DIFFERENCE
If you are considering implementing a FAMILY TRUST for your personal residence, it is also important to look at how you will structure any bank debt that remains on the property. There are two distinct ways of handling this, and each has its specific differences.
Total Value Gifting
With a TOTAL VALUE GIFTING PROGRAMME, you would sell your personal residence to the FAMILY TRUST and enter into a deed of acknowledgment of debt for the full purchase price. The outstanding loan that would still be owing to the bank would remain in your personal name, with a new mortgage and guarantee provided by the bank from the trustees of the trust. Over time, you would be personally repaying the bank loan out of your personal funds, and this would not have any definite connection to the FAMILY TRUST or impact your GIFTING PROGRAMME. Structuring the debt in this way also means that you have a precise amount to gift for your GIFTING PROGRAMME, and if you choose to do a lump sum GIFT after 1 October 2011 when GIFT DUTY no longer applies, then your GIFTING PROGRAMME is very simple in relation to that asset. For
Example: If you sell your home that is valued at $324,000 to your Family Trust and leave the bank loan of $270,000 in your personal name you will have a deed of acknowledgment of debt that the trust owes you $324,000 for the purchase of the property, and you will be able to do gifting based on the full market value of the property. Therefore, the TOTAL VALUE GIFTING structure means your gifting is easy to keep track of. This means that the TOTAL VALUE GIFTING method is suitable for people who want an easily understandable gifting structure.
Equity Value Gifting
With EQUITY VALUE GIFTING the personal residence is still sold to the FAMILY TRUST for the current market value, but the key difference is that the bank loan is also transferred to the names of the trustees, with a guarantee provided by you personally. This means that the acknowledgment of debt detailing the amount the trust owes you for the purchase is only for the equity amount you have in the property.
For Example: If you sell your home that is valued at $324,000 to your Family Trust and transfer the bank loan of $270,000 to the names of the trustees you will have a deed of acknowledgment of debt for only $54,000 for the amount the trust owes you for the purchase. This will mean your immediate gifting programme would only take account of the amount of equity you have in your property. The key difference with the EQUITY VALUE GIFTING is that you must keep specific track of what repayments you make off the principal on the bank loan each year. This is because if you pay $10,000 off the principal amount owing to the bank each year, that $10,000 is a further loan you have made to the trust from your personal money. That further loan needs to be GIFTED at some point in time.
This means that the EQUITY VALUE GIFTING method is suitable for people who do not mind having a GIFTING PROGRAMME that could run for a longer period than the TOTAL VALUE GIFTING method, but who are still willing to keep ongoing checks on the repayments they are making to the bank and progressively gifting those assets.
However, whether the EQUITY VALUE GIFTING method or the TOTAL VALUE GIFTING method is used, in both situations the total amount that would have to be gifted over time would be the same (i.e. the original value of the property at the date it was transferred to the FAMILY TRUST)