Lets look at what a “Family Trust” is
A Family Trust is one of the most common small business structures in Australia. Unlike, say a Unit Trust, you establish a Family Trust to benefit the members of a family. Family Trusts provide families with a great deal of flexibility in sharing the tax burden among family members and protecting family assets.
The Family Trust structure is useful if your family holds capital growth or income-generating assets. Some of the key attributes of the Family Trust are:
– It offers some protection from bankruptcy and insolvency
– It is a relatively low cost and simple structure to use
– It allows you to distribute income to family members who are on low tax rates
– It allows you to “stream” income: you can distribute one type of income to one person and another type of income to another person.
Good things about Family Trusts
The Family Trust is considered the most flexible business and investment structure in Australia.
There are many commercial and tax advantages. They are useful for both trading and investment:
In a Company, the director (and any one acting like a director) often goes down with the company when the company can’t pay its debts. However, in a Family Trust, the Family Trust can run out of money and no one else goes down with the trust. the Settlor, Trustee, Appointor and Beneficiaries aren’t usually exposed to the debts of the Family Trust.
However, if you guarantee the debts of the Family Trust then you are liable. Also, if the Trustee owns premises and someone falls over you may be personally liable under occupier’s liability – even though the trustee only holds the premises in trust for the beneficiaries.
You can put a corporate trustee in as trustee. However, then you have to comply with all the Corporations Law and other complex regulations.
The Deed wording of a Family Trust should be that the Settlor and potential beneficiaries aren’t responsible for the debts and other liabilities of the trust. The trustee is, however, subject to the common law fiduciary duties and state trustee law. Also, if you put in a corporate trustee then you have to suffer all the compliance work under the Corporations Act as well.
Confidentiality of trading results
A trust (including a discretionary trust) is not subject to the over regulation that companies suffer. Apart from lodging a tax return (which is confidential) no one knows your business. Compare this to a Company. For a company each year you have to provide confidential information about your company. Much of that information is searchable and in the public domain. People regularly trawl these public records looking for information about you. A company is everyone’s business. A trust is private.
Of all the tax benefits in a trust this is the greatest. Each year your hunt down from your group of beneficiaries (which is 100s of people) those that are paying tax at low rates. For example, you can distribute $6000 to your 18-year-old daughter at university; if she has no other income then the tax on this is zero. (She of course shouldn’t ever see the money. It is just a book entry.) Even if you have only yourself you can still distribute to a company and only pay tax at the corporate tax rate of 30%. You are therefore each year able to change who gets the income of the trust to exploit the progressive rates of tax. You can have a Company as a beneficiary. The Company need not be the Trustee. Note that any unpaid beneficiary amounts are normally payable on demand, this can be overcome, please ask one of our accountants.
Your son a beneficiary goes bankrupt
That is fine. Until your son went bankrupt you were making distributions to him. In future you just don’t make distributions to him while he is bankrupt. The assets in the trust are protected. The trust may lose your son’s loan accounts. (This is where your son gifted or lent money to the Trust then that money may be lost to your son’s Trustee in bankruptcy.)
The Trustee or a Director of a Corporate Trustee goes broke
What if a director of the Corporate Trustee goes bankrupt? What is the Corporate Trustee becomes insolvent? As Appointor you sack the director. As Appointor you merely appoint a new trustee.
Increase or reduce capital
The Appointor can instruct the Trustee to accept more funds into the trust. The trustee can also “vest” (give) capital amounts in any of the beneficiaries at any time. (When you move or transfer an asset to anyone you have to consider Capital Gains Tax, Stamp Duty and other taxes.)
Ability to distinguish between income and capital beneficiaries
This is another great tax saving power. One beneficiary may want a capital loss (to offset his capital gain). Another beneficiary may have a low income and can take income without paying much tax. We have your Family Trust Deed drafted that you can pay capital to one beneficiary and income to another.
“Attribution” of different “income classes”
You trust deed should provide for the “attribution” of different classes of income and capital. A distribution of class income (like franked dividends) can be made to one beneficiary. The beneficiary gets with that money the “attributes” of that particular class of income flowing through. A company can’t do this.
When you die your assets stay in your Family Trust. Whoever is your next Appointor controls them. This avoids Capital Gains Tax and Stamp Duty.
Useful for generations to come
The deed for your Family Trust should be drafted so that when your grandchildren have children then those people automatically become beneficiaries of your Family Trust. For example, if you set up a company then, if you are a shareholder then that company automatically becomes a beneficiary of the trust without any re-settlement issues.
Bad things about Family Trusts
A Family Trust can operate for up to 80 years. You can distribute all the assets out of the trust at any time, however, after 80 years you have to distribute all assets.
If you and your business owner want to buy a property together then a Family Trust is no good for you. Appointor is God and bosses the Trustee around. Appointors have to act unanimously. In a Unit Trust or Company the majority rule.