Buying assets in the right name
In February 2021, I wrote an article: “10 steps to take before you invest your money” that shows you, how to create a successful investment plan
Unfortunate thing is that when it comes to investing, most people will immediately start thinking about what product to use, rather than think first about the reason for investing and setting up your plan according to each need or goal.
Why am I mentioning this older article today? Well….today is our deep dive into the Step 7 from that old article and we will discuss different ways of asset ownership and impact it has on other aspects of your financial set up.
Choosing the correct investment ownership can be complex and confusing, but really needs to be done correctly as it can represent a significant difference in financial outcome, sometimes thousands of dollars difference, but what is even more important is the issue of asset protection, that is completely under-estimated, but will appear in the moment of tragic events, when you really do not want to have any more problems.
What forms of assets ownership do we have in Australia?
1. Self-owned – sole-ownership
2. Joint –so called Joint Tenancy
3. Tenants in common
4. Trust
5. Company
6. Superannuation
In order to decide on the investment ownership structure, there are lots of things you need to take into consideration:
1. What is your end goal?
2. What is the investment timeframe?
3. Tax
4. Legal issues
5. Retirement and Age Pension
6. Estate Planning issues
So let’s start with our list:
1. Self-ownership – This is the simplest type of asset ownership, directly on your personal on your name only. You are the sole owner of the asset, you alone are responsible for tax payable on this asset, such as income tax or CGT. It is great when you are single. If you are in relationship, other factors need to be taken into equation, outside of simplicity – such as tax, assets security and estate planning. If you run a business, where you could be exposed to a financial liability, then self-ownership might not be the best idea, as asset security should be investigated in greater details.
From the estate planning point of view, all self-owned assets participate in the Will distribution and are subject to probate, and can be challenged by anyone, who believes has a right to benefit from the estate. Therefore, self-ownership does not provide any degree of asset security, but if there is no problem with the estate, it is and easy way to pass assets to your beneficiaries.
2. Joint with your partner – also very simple ownership where all partners own investment 100% each. Any income earned gets split equally between partners, as well as tax liability is shared at equal portion. This type of asset ownership is the easiest from the Estate Planning point of view, as If one partner passes away, the asset automatically belongs to the surviving partner or partners in full, with no requirement to go through any legal process of Deceased Estate Distribution, as joint assets are not part of the Will.
But there are drawbacks, because if for example you own an asset jointly with a partner, and your partner borrows money against that asset without telling you, and defaults on the loan, you are both responsible regardless of your lack of knowledge. Also, each partner has the same rights to do with the asset what they want, so your partner could withdraw the balance without your knowledge and do whatever he/she wants with the money.
So, this type of asset ownership is fantastic, especially from a simplicity point of view, but it is based on a great deal of trust between partners.
Providing there is trust between partners, then this is the easiest and most recommended way of assets ownership especially in retirement. This is a sure way to take over the full 100% asset ownership in case one partner passes away, therefore the second partner can continue with life, and not wait for the Estate Distribution of all the matrimonial assets.
3. Tenants in Common – very popular form of asset ownership in Australia in 50s and 60s, less now, but it can be most appropriate for specific purposes.
As explained before, in the case of joint ownership – each partner owns the asset 100%.
In Tenants in common situation – it is a defined split of asset ownership – as per your agreement – the split can be: 50/50, 60/40 or any split you want – there could be more than 2 partners in the agreement as well. Benefits: – you own you share, and you are not responsible for another person’s liability. The partner cannot do whatever they want without your knowledge, as your share does not belong to them.
If one partner dies, you just have your share, and the deceased share is subject to Deceased Estate Distribution as listed in the Will of a deceased partner.
This type of asset ownership is still used by partners, but I would not recommend it in the family situation.
4. Trust
5. Company
Those two are mainly used for the purpose of asset protection and tax minimisation, I will not concentrate on those, as they require personal advice from financial planner together with an accountant and a lawyer.
6. Superannuation – most people don’t know, but super is a type of trust, but because it is under very specific rules, that are different to those of a general trust, and is governed by APRA (or ATO if you have a SMSF) – it gets listed as a separate type of asset ownership.
Superannuation trust has lots of legislative rules around contributions, tax, ability to draw funds, pensions limits, access to fund. I have created and extensive list videos devoted to explanation of superannuation and rules that govern this type of investment, so please review my channel and watch them all to understand how super works.
But it is not only rules introduced by legislation, each trustee of each super fund will also introduce their own rules, therefore sometimes comparing super funds is quite difficult, as each trustee could introduce different restrictions to their fund, or go the other way, allow for more flexibility or variety, especially when it comes to investment types used and limits applicable to such investments.
Understanding asset ownership is essential, as the correct decision needs to be taken before you purchase the asset, otherwise you could introduce lots of problems later in life, for example:
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- high tax on sale of the asset later on in life, that would have been paid if you used a different structure at the purchase time.
- Difficulty to be eligible for government benefits, as assets are incorrectly owned
- Inability to access assets at the time when you need those assets and legally you have no access to them (eg. superannuation)
- Estate exposed to possible challenges, that otherwise could have been avoided
- Assets are not easily passed on to your chosen beneficiaries, but subject to a possible family dispute
I hope you found this article of help, but if you are still unsure or just wish confirmation of your choices being correct for your long-term benefit, just contact me for advice.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
