Jacqui is the principal solicitor and director of Theobald Lawyers Pty Ltd. At the moment, she is everything to everyone! All legal services you may require - small business services, property services, family law, criminal, commercial or neighbourhood disputes.
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This is a complex area, because there are many forms that a trust can take. So I wanted to give you a basic overview of trusts and the family trust in particular. A family trust can be very useful for running a small business, or having your investment portfolio including real estate investments in the family trust.
Trusts can be fixed or discretionary; they can be set up whilst you’re alive (inter vivid) or in your Will (testamentary); they can be set up by deed or they can arise automatically due to operation of the law; and trusts can be for the benefit of a person or they can be for a charitable purpose.
Our focus is on the advantages and disadvantages of a family trust, which is a discretionary trust that limits the groups of beneficiaries to family members of the primary beneficiaries.
Basically, a trust exists when someone holds property for the benefit of someone else. One useful metaphor I have heard is that you can think of a trust like a child’s little red toy cart. The child puts all their toys and possessions into the cart. The child can pull the cart around himself, or could get someone else to pull it around for him. If the child falls over, then his possessions are safe in the cart. In this example, whoever has control of the cart is the trustee of the trust. The child falling over could be likened to someone going bankrupt or some other crisis in their life.
Trusts have traditionally been used as a tax minimisation vehicle, and this is still one of the reasons why a family discretionary trust is so popular with accountants, along with the income splitting ability. Over the years, quite a few of the tax advantages of various types of trusts have been scaled back, but they are still used as a structure for investment, operating a business or for asset protection and wealth creation.
The main advantages of a family discretionary trust include:
- Income splitting between beneficiaries to minimise income tax paid;
- Income streaming, so one kind of income can be paid to one beneficiary and a different form of income can be paid to another;
- Asset protection, particularly if a corporate trustee is used since assets will be held in that company instead of personally; and
Some of the disadvantages of a family discretionary trust include:
- No one beneficiary can have an absolute entitlement to income or capital, so succession and control issues are crucial;
- The trust doesn’t last forever, like a company, the trust is generally limited to 80 years;
- Capital losses are trapped in the trust; and
- Asset protection in family law separations are marginal.
There are a few main roles to be aware of when dealing with a trust:
- the trustee is the legal owner of the trust property. This is the person in control of the cart, using the above example. The trustee administers the trust, does the tax returns, controls distributions of income and capital, and runs any business that the trust operates. There can be more than one trustee, and the trustee can be an individual person or a company.
- the beneficiary is the person who benefits from the trust. They could hold a fixed percentage of the total value of the trust, or their interest could be at the discretionary of the trustee (like with a family discretionary trust). There are usually multiple beneficiaries and categories of potential beneficiaries who entitlements may vary. The trustee of the trust can also be a beneficiary (though this can remove some of the protection to assets that the trust could offer).
- the appointor is a role often used with a discretionary trust. This is a specific person, or sometimes a company, who has the power to remove or replace a trustee. Hence, this is a very powerful position.
- the settlor is an old fashioned role. This is generally a third party, such as the professional helping to set up the trust, and their only purpose is to found the trust by paying the first minimal payment in to the trust, and signing original documents. That is usually the extent of their involvement.
Before you set up a family trust to grow your wealth, make sure:
- you get advice from someone who understands trusts, and which type of trust would be best for you and your family;
- you consider who you are appointing to the important roles in the trust and how the succession of those roles works;
- you understand the advantages and disadvantage of your trust;
- you read your trust deed and have the powers of the trustee and other mechanisms explained to you (this will show whether your professional advisor understands the trust or not!);
- you consider the extra fees that you will pay annually to keep the trust operating; and
- you understand an other fees that may be involved in transferred assets into the trust.
If you want further advice or information, please don’t hesitate to contact me. You can send me your details directly by clicking here and we can schedule a time to catchup.
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