How does gifting to a Trust work?

Question from Glen updated on 25th May 2009:

I have a question regarding transferring a house into a family trust. I will use an example to illustrate my question. Bob has a house with current market value of $800,000 he has $300,000 equity in the house. He sets up a family trust, the trust then has to borrow money from Bob to buy the house, and then Bob starts the gifting process. Does Bob have to gift the the full $800,000 across to the trust, or just the $300,000? If so, what happens to the remaining $500,000 that is still owed to the bank and how does this get into the trust?

Our expert Mark Withers responded:

Hi Glen,
Generally, it is the equity in the property that will be gifted. This assumes the trust will acquire the property and the mortgage and will accordingly acknowledge a debt to Bob for the $300,000 difference between the value of the property and the debt owed.

If Bob then sets about reducing the trusts mortgage he is making "further advances" to the trust. These advances increase the amount he is owed by the trust and it is appropriate that they be periodically tallied and formally documented with the trusts Lawyer.

Some lawyers choose to transfer the property to the trust without transfering the mortgage. In this case the full $800,000 is acknowledged as owing to Bob. This approach avoids the need to update the deeds of debt owing to Bob as the loan is repaid but also can result in more gifting being done than the true equity that Bob has in the property.

My preferance is for the first approach.
Thanks for your question
Mark Withers




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