Placing your family wealth in trust
By Dee Chan, Financial Advisor
The basic function of a trust is to separate control and ownership. The result of using a trust is that assets are protected and profits are distributed in the most tax-effective way. There is 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.
While there are many types of trusts the two most commonly used are:
- Testamentary trust – set up through a directive left in a will, which takes effect after the will-maker’s death;
- Discretionary trust – set up by a ‘trust deed’, which commences during the life of the individual(s) establishing the trust.
Both types allow for income and capital to be flexibly distributed to beneficiaries, while those 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. 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. A trust can operate for up to 80 years in Australia, though it is common to have a clause within the trust deed to allow the trustee the option to wind it up earlier if considered appropriate.
Benefits of using trusts to manage family wealth
- Cost: For a straightforward structure, the costs of establishment are relatively low. Specialist advice should be sought for more complicated family scenarios.
- Effective family tax management: Income can be directed to members of the family on lower tax rates. It also allows different types of income to be directed to different family members.
- Simplified regulation: Trusts are less complicated than operating a company structure.
- 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. Where potential beneficiaries live overseas, specialist advice should be sought to determine the optimal structure.
- Protection of assets: Under certain conditions, family assets may be protected from creditors in the event of bankruptcy or insolvency.
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 wealthy people in Australia use family trusts to gain some peace of mind that their loved ones will be looked after financially when they no longer can, but you don’t have to be rich to benefit from a well-planned structure.
If you would like to discuss your estate plan, please contact us.
Dee Chan is an authorised representative and credit representative of AMP Financial Planning. Blueprint Planning Pty Ltd (ABN78 097 264 554), trading as Blueprint Wealth, is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee 232 706.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
If you decide to purchase or vary a financial product, your financial adviser, AMP Financial Planning and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.
Sources:
www.ato.gov.au – Estate Planning – Testamentary Trusts; General – Tax issues & trusts – tips and traps
www.moneysmart.gov.au Wills & Powers of Attorney – Testamentary Trusts
www.investors.asn.au Education – Estate planning – Testamentary Trusts/
Photo by Jude Beck on Unsplash
