Using Family Trusts To Manage Wealth And Save Tax

Family Trusts - a practical investment vehicle

Using Family Trusts To Manage Wealth And Save Tax

Family trusts are a popular and effective investment structure to manage and protect your family’s fortune, but you don’t have to be worth a fortune to benefit from having one.

Despite their appeal, they are not for everyone. Indeed, it is suggested that if your assets are less than $300,000, and that is not counting your super, then it may well not be worth your while.

But for those with sufficient assets, a family trust can be an effective way to protect your family’s assets and limit your tax liability at the same time. So how do they work?

What is a family trust?

A family trust is a discretionary trust, where assets are placed in the care of a third party, the trustee, who manages it on behalf of the beneficiaries.

Discretionary trusts are so named because the distribution each year of the income and capital gains earned by the trust to the beneficiaries is at the total discretion of the trustee.

Beneficiaries are members of the trust and might include parents, children, other close relatives, and their spouses. A beneficiary may also be a company.

Key benefits

As mentioned, the key benefits of a family trust are asset protection and tax minimisation. A trust provides protection from creditors in bankruptcy, but the contents of a trust can be included as part of the matrimonial pool when it comes to divorce.

All income of the trust, including realised capital gains, must be distributed each year. It is then included in the beneficiary’s assessable income and taxed at their personal tax rate.

As a result, a trust can work particularly well from a tax viewpoint, if you are on a high marginal tax rate but your beneficiaries are on low marginal rates. If all individual beneficiaries are on a marginal tax rate greater than the company tax rate, then a family trust may include a corporate beneficiary to reduce tax.

More flexibility

Another advantage of a family trust is that it offers a flexible, tax effective structure to accumulate wealth for retirement alongside superannuation.

Their flexibility also makes them particularly attractive for small business owners who may run the business through a company structure but hold shares in that company in a family trust. The trust can then direct different types of income such as rental income from your business premises, franked dividends from company profits or capital gains to different individuals.

A family trust can also help with succession, allowing you to pass control of the family trust to the next generation by changing the trustee, without triggering a tax event.

There are some disadvantages too. There is the loss of ownership as the trust now owns the asset, not you. Also, if the trust suffers an investment loss, those losses cannot be distributed to offset your personal tax liability but must remain inside the trust. And there are costs involved in setting up and managing the trust.

Setting up a trust

To set up a family trust you will need to consult a lawyer to create a trust deed. You will also need to do the following:

• Appoint a trustee and determine your beneficiaries

• Decide which assets to include in the trust (a wide range of assets including stocks, bonds, managed funds, cash, real estate, antiques and fine art can all be included)

• Apply for an ABN and a Tax file number (TFN) and open a bank account in the name of the trust.
It can cost some $2500 to set up the trust and there will be annual fees as you have to file with the Australian Tax Office each year. Stamp duty applies in both NSW and Victoria on establishment but not in other states.

What about testamentary trusts?

Another type of trust popular with families is a testamentary trust which is created within your Will and does not come into effect until your death. Similar to family trusts, they have the advantage in estate planning of providing tax and asset protection benefits for the future.

Family trusts are popular for good reason, but you need to make sure it is appropriate for your family’s circumstances. If you would like to know more, give us a call.

This advice may not be suitable to you because contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Protecting Your Family Assets with Trusts in Australia

This article provides a brief overview of the different ways you can use Trusts in Australia to protect your wealth from tax, litigation and other threats.

Making money, or inheriting it, is one thing. Holding onto it until you, or your chosen beneficiaries, are ready to spend it is another entirely.

You may think holding onto your money just means avoiding careless spending and loss-making ventures. But if you do, you’re missing two major types of threat. Threats that ravage family wealth, and which often materialise suddenly when it’s too late to do anything.

Those threats are legal sequestration of assets, and taxation.

Transferring your assets into a trust helps you shield your assets from those threats before they ever arise.

Legal Sequestration

Assets can get sequestered for many reasons, some more foreseeable than others.

The common ones are:

  • Family law proceedings, such as divorce, separation of de-facto partnerships and challenges to wills.
  • Bankruptcy proceedings. Note here, a sudden unexpected cash flow shortfall and one impatient creditor are all it takes to go bankrupt. Strong business profits and large incomes do not exempt you from bankruptcy.
  • Being sued for one reason or another.

Taxation

Death and Taxes are the only two certainties in this world, as the saying goes. But often, what seem like minor technicalities create painfully large tax liabilities.

By planning ahead and future anticipating tax liabilities on investment income it’s possible to use a trust structure to reduce the amount of tax paid significantly.

How Does a Trust Work?

Simply put, a trust provides protection for your assets and lets you distribute profits in the most tax-effective way.

It separates the function of control and ownership.

There’s no ‘one-size-fits-all’ type of trust. The trust you use depends on many factors, such as the type of asset or business, financing, income type, marital status, susceptibility to being sued – just to name a few.

You’d normally create a trust with the help of a specialist, such as an accountant or lawyer.

There are many types of trust. But the two most commonly used are:

  • Discretionary trust – set up by a ‘trust deed’, which commences during the life of the individual(s) establishing the trust.
  • Testamentary trust – set up through a directive left in a will, which takes effect after the will-maker’s death;

Both types allow for income and capital to be flexibly distributed to your chosen beneficiaries – which can include the original owner who set up the trust in the case of a Discretionary trust.

The special ‘magic’ of the trust is that beneficiaries have no legal entitlement or interest in the trust’s property until the trust deed declares it so.

The trustee is the legal owner of the trust property and is responsible for managing the trust fund on behalf of the beneficiaries.

Vitally, the trustee has a legal duty to obey the terms of the trust deed and to always act in the best interests of the beneficiaries.

Benefits of using trusts to manage family wealth include:

  • Effective family tax management: a trust can direct different types of income to members of the family on lower tax rates.
  • Tailoring: Most modern day trust deeds are flexible in their operation and can often cater for a wide variety of beneficiary classes and investments.
  • Geographical flexibility: A trust established under Australian law can operate effectively in every Australian state.
  • Protection of assets: Under certain conditions, trusts protect family assets from creditors and bankruptcy.

Due to the taxation flexibility that discretionary trusts provide, the ATO scrutinises these trusts to ensure all transactions are undertaken on a commercial, arms-length basis.

It checks that distributions are in accordance with the trust deed, specifically targeting the distribution of different types and amounts of income to individual beneficiaries.

Trusts allow considerable estate planning benefits providing more certainty in how your assets will be dealt with after your death.

Many people in Australia use family trusts to provide for loved ones after they’ve gone.

You don’t have to be rich to benefit from a well-planned structure.

Would you like to know more about setting up a trust to protect your wealth?

Contact House of Wealth today to set up a free financial planning consultation.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.