Warnocks October Newsletter - Is setting up a Family Trust (still) a good idea?

Carrying on a Business, or investing - Many of our clients use a Family Trust (a discretionary trust) to carry on a business, and/or to hold investment assets. Trusts can provide some degree of separation from the family and thus some degree of asset protection. It could be a good idea to set up a Family Trust if you have some spare cash or other income-earning assets that are not encumbered, and there are enough family members or qualifying wholly-owned entities that could receive the trust’s income.

Opposition Policy - One should consider the Federal Opposition’s policy, announced in July 2017, to tax distributions from Trusts at 30%. Labor acknowledged that Trusts can be legitimately used by individuals and businesses for several reasons, including asset protection and business succession. However, it says discretionary Trusts also have attractive tax advantages and are used by high-wealth individuals to minimise their tax obligations. The proposed measure would apply to trust distributions from 1 July 2019. Annual Income distribution - Trust income is distributed annually, usually to members of a predetermined ‘Family Group’. Generally, the Trustee has discretion to distribute income to those members of the group with the lowest taxable incomes. A formal Trustees’ resolution to distribute income is required. It must be noted that a distribution of income to a beneficiary creates a legal entitlement to the income distributed. Capital Gains Tax - Trusts are entitled to receive the general 50% discount on capital gains. This is in contrast to companies that are taxed on capital gains at the ordinary company tax rate. Setting up a Trust - To establish a Trust, a person settles a sum of money upon a Trustee. This person is known as the Settlor. Generally, a Settlor will have no further dealings with the Trust, as there are restrictions on any further interaction between the Settlor and the Trust. Settlement Sum and other funds - The amount of the settled sum is often $100 or possibly even less. This amount is held on trust by the Trustee, and is known as the trust corpus; it is the duty of the trustee to safeguard these funds, as if they are lost, the Trust will fail. Of course, once a Trust is established, it can acquire assets by borrowing from the family’s resources, or from outside financiers. Amounts loaned to the Trust do not have to bear interest, unless the lender is claiming a tax deduction themselves for funds advanced to the trust. Amounts loaned to the Trust are a legitimate debt of the Trust, and will rank alongside the Trust’s creditors. The Trustee - Trusts are managed by a trustee, who could be one or more individuals, or a company specially set up for the purpose. An important power is that of the Appointor of a Trust; these powers include the ability to appoint a replacement trustee, should that be deemed necessary. The Trustee’s powers and obligations are determined by the trust Deed, and by the body of Trust law. Trustees are obliged to prepare annual accounts for the Trust, and to lodge an income tax return. Trust Assets are separate from other assets - It is important to realise that assets owned by a Trust do not form part of a person’s estate, and thus they are not specifically controlled by a person’s will. If the Trustee is a company, control of the shares in that company can be dealt with by a person’s will. Where the Trustees are individuals, control of the assets could be established by leaving a power of appointment. Costs to set up and to operate - A family Trust can be set up in a few days, and a tailor-made Trust typically costs less than $500 to establish, plus Stamp Duty of $200 for Victorian Trusts. The cost is more if a company Trustee is required. As well as making an annual distribution of income by 30 June of each year, the Trustee of a Trust has to prepare annual accounts, and to lodge an annual income tax return. Do you want to know more?
Please do get in touch with us if you would like to know more about setting up a Family Trust. This summary is intended to be a general guide to the operation of a Family Trust, and should not be taken as containing all of the information required for you to make an informed decision as to whether to set up a Family Trust.

Disclaimer: The information in this newsletter is provided for informational purposes only and should not be relied upon as specific advice. Warnocks Pty Ltd does not accept any liability in respect of this information.