Say What Wednesdays

Do you need a family trust?

This week’s question is, ‘do I need a family trust?’. I have had a few questions about this over the past weeks, however in order to avoid making this ‘personal advice’, I thought I’d just talk about it in more general terms.

What is a family trust?

  1. Family Trust refers to a Discretionary Trust set up to hold a family’s assets or to conduct a family business
    • Established by a family member for the benefit of members of the ‘family group’
  2. Established to hold assets for mainly two reasons:
    • asset protection or
    • tax purposes (will come back to this)

The Trust

  1. Settlor – settlor executes the trust deed and then, generally, has no further involvement in the trust
  2. Appointor – Has the power to add or remove trustees (controlling power)
  3. Trustee
    1. Role – the trustee is responsible for the trust and its assets
      • broad powers to conduct the trust and manage its assets
    2. Types
      • Individual – Can be mum and dad for instance, in a family situation
      • Corporate – Company acting as trustee – Directors
        • Additional layer of protection and flexibility
  4. Beneficiaries
    1. Named (Primary) – receives the benefits
    2. Secondary – Spouse, de facto, children (generally family members)
    3. Company – Corporate beneficiary

 

How a trust works

Assets are owned by the trustees, held in the trust

  • A separate environment, even if transferring from individual to same individual as a trustee, it’s still a transfer of ownership

Types of assets

  1. Shares
    • Franking credits received by beneficiaries
  2. Property in trusts
    • Loss of negative gearing, unless income can fully offset
    • Property taxes

Trust income – Distributions

  1. All distributions must be made only to people who qualify under the terms of the trust deed to be beneficiaries of the trust.
    • Distributions are not payments! – completed on tax returns but don’t actually have to be physically paid out
  2. Forms part of a beneficiary’s assessable income – taxed at personal marginal tax rate
    • Trust does not have to pay income tax on income that is distributed to the beneficiaries
    • Trust pays tax on undistributed income
  3. Where distributions go wrong
    • If a family trust makes a family trust election and then pays out to someone not a member of the family group, they will be taxed at the maximum rate possible
    • Undistributed income is taxed in the hands of the trustee at the top marginal tax rate of 45%
    • Penalty tax rates can apply to distributions made to minors

Benefits 

  1. Flexibility – Tax planning
    • favourable taxation treatment by ensuring all family members use their income tax “tax-free thresholds’
    • Capital gains tax can be distributed – split between beneficiaries
  2. Asset protection
    • protecting the family group’s assets from the liabilities of one or more of the family members (for instance, in the event of a family member’s bankruptcy or insolvency)
  3. Estate planning
    • provides a mechanism to pass family assets to future generations
      • Trust life of 80 years
    • Helps avoid challenges to the will following a death of a senior member of the family

Situations where it will work

  1. Wanting to invest and accumulate wealth
    • OR, own a business
  2. Asset protection – Are you in a situation you will be sued
  3. Taxation planning – Will you have people to distribute to?

What is important for a trust – Long term Planning!

  1. Transferring owned assets in has problems
    • CGT – The transfer of assets from your own name into a trust is a sale
    • Stamp Duty (For property) – The trust would need to technically buy the property off you

Thanks for listening…if you have a question or want to provide any feedback, go to https://financeandfury.com.au/contact/

 

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