Putting Your Home in a Trust
One asset protection strategy that is often considered is putting your home in a trust. While this may offer some asset protection benefits, it also comes with significant tax consequences, particularly the loss of the Capital Gains Tax (CGT) principal residence exemption.
Before you transfer your most valuable asset into a legal structure such as a company or trust, here’s what you need to know about how family trusts work, when they do and don’t protect your home, and why CGT issues can often outweigh the protection benefits.
What Is a Family Trust and How Does It Offer Asset Protection?
A family trust is a legal structure where a trustee legally owns assets on behalf of beneficiaries. This separation can offer a layer of protection from personal creditors and keep wealth outside of your personal estate.
From a taxation point of view, a Trust allows for income splitting among family members to help with taxation for a family business. When a Trust holds the asset, the individual then doesn’t own the asset directly. This may be useful and protected in the event of Bankruptcy or a business collapse. Courts can look through a trust if the arrangement appears to be a “sham”, especially if the trustee and beneficiary are the same person. Assets transferred into a trust shortly before a legal claim may be unwound. In family law matters, trust assets can be considered part of the asset pool, primarily if they’ve supported the family’s lifestyle.
Why People Think About Putting Their Home in a Trust
Homeowners often consider placing their house into a trust in order to protect their home from lawsuits or bankruptcy. For estate planning to avoid challenges to their estate after death, sometimes people remove their home from their personal name for privacy or to allow for structured ownership across generations.
For business owners, doctors, or professionals exposed to litigation, the strategy seems appealing, but is it?
A bid decision is the Capital Gains Tax Trap: Losing the Main Residence Exemption.
/>/>/>/>/>/>/>/>/>The biggest downside of putting your home in a trust is forfeiting the CGT principal residence exemption. If an individual owns and lives in the property, it can usually be sold completely CGT-free. But when a trust owns the property, the home usually does not qualify for the CGT exemption when held in a Trust. The gain is fully taxable, either in the trust or by the beneficiary. Tax rates could reach up to 47%, turning what should be a tax-free sale into a potential significant tax liability.
Other Costs and Consequences
Transferring your home to a trust also triggers several immediate and ongoing issues in areas of borrowing and state taxes. Even a trust that excludes a spouse is not guaranteed protection. The Family Court can and does treat trust assets as part of the relationship pool in settlements.
When Putting Your Home in a Trust Might Make Sense
While often not recommended for your primary residence, using a trust may be appropriate when:
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- Purchasing an investment property, not a home.
- You have no intention to sell, or CGT isn’t relevant.
- The home is intended for future generations, and protection is a top priority.
- The trust is part of a wider estate or business strategy, with legal guidance.
Getting the Balance Between Protection and Tax Efficiency
Putting your home in a trust can provide asset protection under the right circumstances—but it often comes at a high tax cost. This is especially if you plan to sell the property in future. Understanding the real-world trade-offs of trust structures is critical—especially when it comes to protecting your family home without losing one of Australia’s most generous tax exemptions.
