Before your eyes glaze over, it’s worthwhile taking a few minutes to understand family trusts, and whether you’re positioned to capitalize on the many advantages a trust can provide for you and your family. We promise we’ll be quick!
How Do Trusts Work?
Trusts are separate legal entities that can own and administer your assets for the benefit of yourself and any beneficiaries you nominate. The trust is managed by a trustee, who is charged with administering the trust. This might be you, a trusted associate, or in some cases a company trustee, which can help overcome continuity issues should one of the trustees die.
Regardless of who is chosen, it’s important they have some financial acumen as they will be responsible for making investment decisions, reporting to trust beneficiaries, and commissioning annual audits among other things.
Essentially you’re vesting ownership of your assets to the beneficiaries of the trust.
What Are The Benefits?
The primary benefit is that trust earnings can be split between beneficiaries, which can work to minimise taxable income. It can also protect assets as ownership is by the entity and not individual members. If you decide that your children will be beneficiaries of the trust then you need a family trust.
Trusts For Asset Protection
As the ownership of the assets is by the trust, this can be an effective way to protect them. If you are in a situation where you, or a family member, may be sued, the plaintiff can come after your assets. If they are held in a separate entity they cannot access them.
This can also be a benefit in the event of a divorce. If you have built a substantial nest egg that you wish to pass onto your children you obviously want to protect it. Should your child separate from their partner, assets sitting in the trust are beyond the reach of a disgruntled ex. If assets are held in their name, their ex may be awarded a share of these assets.
A family trust can also provide benefits where children are considered financially irresponsible. Passing your assets directly to them leaves you with little room to determine what they do with these assets. Leaving them in a trust will give the children the rights to the income without controlling the assets directly themselves.
Tax Advantages of Trusts
A trust arrangement means you can change who receives income from the trust. This provides you with an opportunity to spread income towards those on the lowest tax bracket, such as partners who aren’t working (or working part time) and children over 18. You need to make sure the income is dealt with correctly.
Small businesses can benefit too. Since mid 2016, they can rollover their assets into a trust structure without incurring the costs associated with changing ownership.
Trusts also enjoy the benefits of the 50% capital gains tax concession, meaning assets sold at a profit after twelve months are not taxed on the full amount.
Family trusts wishing to take advantage of tax concessions must make a family trust election with the ATO and continue to meet the definition of family in terms of the beneficiaries and trust structure.
Set Up Costs
A trust can be established from as little as $1500, although this will depend on how complex the financial situation is, and the number of beneficiaries involved.
It’s important to speak to both your tax adviser and your lawyer to understand the role that a family trust can play in your affairs, and whether it is the right option for you.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.