I am a 30-year-old public servant with a $115,000 salary, a maximum annual savings potential of $40,000 after maximising super contributions, and a diversified portfolio of exchange-traded funds (ETFs) of $500,000, which is still valued 15 per cent below its 2021 peak. I am single and renting, with no debts. I recently learnt that leverage can greatly magnify my gains (and losses). If I took out a margin loan on my ETFs, the maximum leverage being 75 per cent, would the leveraged position in local or US stock markets deliver better net gains compared to a mortgaged investment property which has a maximum leverage of 95 per cent?
It comes down to timing since neither share nor property markets grow evenly and fluctuate wildly. If you’re going to borrow to invest, the lowest risk occurs after a market fall.
Leveraging your investments in a falling market can lead to you being margin called.Credit:Peter Braig
Conversely, an investment at the top of a sharemarket rise can lead to a margin call or your shares can be promptly sold. With Commsec, for example, its margin call must be met by 2pm the next day. As you would know, both property and sharemarkets are now high.
I prefer that people plan to buy a home into which they wish to live, noting that an 80 per cent loan to value ratio allows you to avoid expensive mortgage insurance – which protects the lender, not the borrower. Think of it as a tax-free leveraged investment that uses your current rent money to steadily increase your equity.
My uncle died interstate last year. He was a bachelor – no partners or children. He has siblings, including my mother, who has been granted letters of administration. Now part 70ZI of the Victorian Administration and Probate Act 1958 says “the residuary estate must be distributed equally between those siblings”. My parents have sufficient investments and don’t wish to affect their age pension, although I don’t think their share, about $200,000, would change the pension much. Can the administrator legally distribute monies directly to the siblings’ children if all the siblings agree? Could they appeal to the Supreme Court?
For other readers, when a deceased person leaves a will, it is carried out by an executor who applies to the court for probate before distributing the assets. If there is no will, then a close relative (preferably) applies for “letters of administration” and distributes the assets according to that state’s law of intestacy, which ranks various family members. I assume their parents have passed away, otherwise one or both rank above the siblings.
Regarding your parents’ lack of desire for their money, the word “must” is in the act and therefore the money must be distributed equally. I’m not a lawyer, but I’m reasonably confident that the court would not look kindly on an administrator who has no good reason to seek to deconstruct the law.
Anyway, Centrelink treats inheritances kindly and does not treat them as income although the money is counted by the assets test and deemed to earn income by the income test.
However, if Centrelink finds that an aged pensioner refuses an inheritance, it is seen as gifting, subject to the usual $10,000 per year and $30,000 per five-year limits, and any excess is counted for the next five years. So, they may as well take the money.
If they don’t know what to do with it, I point out that most homes could do with expensive maintenance to preserve their value. Also, looking down the road a touch, the cost of aged care, should one of them fall ill, is steadily rising.
I am one of the two trustees and beneficiaries of a family trust. Can I borrow from the trust to buy myself a new home? If so, are there any limits to the interest I must pay and any tax considerations? Also, the trust owns an investment property – can I buy this from the trust and, again, are there any tax and legal limitations?
Note two main points: (i) you must read the trust deed carefully as it will spell out what the assets in the trust can be used for and (ii) each trustee has a fiduciary duty of care to both beneficiaries.
Assuming the deed allows it and the two of you, each in your separate capacities as trustee and beneficiary, agree, then there is no law preventing you from receiving a loan or buying the investment property.
To protect each beneficiary’s interests, any loan agreement or purchase contract should go through an independent lawyer and accountant, and be established as an arms-length transaction. Where the trust earns interest and rent, it usually flows through untaxed to the beneficiaries.
Just be careful if you plan to set up a private company as trust loans to private companies and related debt forgiveness, etc can lead to complications that your accountant can explain in detail.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. All letters answered.
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