QUESTIONS & ANSWERS ON FAMILY TRUSTS
Can I trade in the trust?
Yes provided a Family Trust Deed allows you to do such things as purchase, sell, trade, run a business in all commercial activities (ie. all types of property purchase/sale, share trading, business purchasing). The trust can buy and sell shares and purchase other securities. It is great for a family business. Very flexible.
The trust can do many things as well as trade. It can hold passive assets. It can buy and sell businesses. It can buy and sell shares. It can negatively, neutrally and positively gear assets.
If Family Trust goes broke is Appointor Liable?
If the Family Trust can’t pay its debts then the creditors can not take all the wealth in the Family Trust.
They will then look around to see if there is anyone else they can get money from.
Provided the Appointor hasn’t signed any guarantees and hasn’t held himself out to be the one owing the money then the Appointor shouldn’t go down with the sinking ship.
What about the Trustee?
At the moment, we are just talking about the Appointor. We have more hints on this topic under the Trustee. However since you ask: It is usually the same for the Trustee of the Family Trust. If the Trustee has the land in its name and someone falls over and you have no insurance (or insurance won’t cover this) then, under Occupiers Liability the Trustee has to make good the loss. If the family trust runs out of money then they can attack the Trustee’s personal assets.
What happens if an Appointor goes broke?
Appointor is the real controller of the Family Trust. If you go broke can the creditors then try to attack your Family Trust just because you are the Appointor?
When you go into bankruptcy your Trustee in Bankruptcy collects up all your assets and gives them to your creditors.
However, as Appointor you may “control” the assets in your Family Trust. You do not “own” those assets. Therefore the assets of the Family Trust are usually not available to creditors if the Appointor is bankrupt.
However, as Appointor you may have mortgaged or lent against the assets of the Family Trust. The Family Trust may have guaranteed some of your debts. In these cases the creditors can go the Family Trust assets up to the value of your guarantee.
Can my wife or ex-wife get any of the assets?
The Family Court looks through the Family Trust as though it wasn’t there. If you:
- are the Appointor; or
- put money into the Family Trust; or
- look like you control the Family Trust (ie. you make your dad the Appointor)
then the Family Court is likely to say that the assets in the Family Trust belong to you.
Is my company a beneficiary as well?
The definition of General Beneficiary includes “any other legal person at least one share or other interest in which is beneficially owned or held by any Beneficiary (including the trustee of an Eligible Trust and an Eligible Corporation)”.
What does this mean? If you are a Specified Beneficiary, Appointor, Trustee or General Beneficiary then if you have a share in the company then the company is automatically a General beneficiary in the trust. For example, you can form a company in the future, give yourself one share and then automatically the new company becomes a beneficiary in your trust.
Tax Advantage – getting the 50% CGT discount
Can this Family Trust seek to obtain a 50% reduction on Capital Gains Tax?
The answer is often yes.
Division 115 of the Income Tax Assessment Act 1997 provides that when calculating the net capital gain, your Family Trust get 50% CGT discount. This is provided you meet the other general rules.
But does the Beneficiary also get this discount?
Unlike a company the answer is yes.
When the net income of the trust (incorporating the discounted capital gain) is later distributed to a beneficiary, the beneficiary gets the additional “gross up” amount in their assessable income (referable to the discount claimed in the trust).
If the beneficiary would have qualified for the discount had the beneficiary derived the gain (and not the trust), then the beneficiary may reduce the gain once again in its own right. The beneficiary therefore preserves the benefit of the discount.
However, if the beneficiary would not have qualified for the discount, then the discount remains reversed, ie. the beneficiary does not have the benefit of the discount.
Therefore your Family Trust doesn’t get in the way of the 50% CGT discount to those that qualify for the discount. It is as though the beneficiary held the asset directly.
Who else can get this 50% CGT discount?
Only individuals, Family Trust, Unit Trusts and Superannuation Funds get the relief. Companies can’t get it through to their shareholders. This is yet another reason why companies have lost popularity.
Now, let’s look at why the Family Trust needs to be “CGT Complying”
In August 2002 all Family Trusts had to be amended. Otherwise you would automatically NOT be able to get the Capital Gains Tax Small Business Toll over relief. The relief reduces the CGT that your Family Trust has to pay when it sells its business.
Your Family Trust and associated persons have to, in total, be worth less than $5 million. However, if you can distribute 100% of your income or capital to a rich uncle (worth $5m) you therefore fail the $5 million test. The “CGT Complying Family Trust” fixes that issue up.
“Specified Beneficiaries” are also called “Takers in Default”, “Primary Beneficiaries” and “Default Beneficiaries”.
Specified Beneficiaries are Beneficiaries that must receive income from the trust if the Trustee fails to make a distribution for a financial year. It is very rare that the trustee ever forgets to make a distribution. This is because the distribution of income, each year, can be done well after the financial year-ends. Nevertheless it is a good idea to appoint some Specified Beneficiaries.
No Beneficiary can demand any of the assets belonging to the Family Trust. The same is true for “Specified Beneficiaries”. “Specified Beneficiaries” also have no right to reach out their hand and ask for any money. It is the Trustee (acting on the advice of the Appointor/Guardian) that decides who gets what from the Family Trust. It is usual to appoint your children as Specified Beneficiaries.
It is often the case that Specified Beneficiaries never get anything from the Family Trust. Whether they get anything is obviously the decision of the appointer.
However, Beneficiaries can demand any unpaid balances in their Beneficiary Accounts. There are actions that can be taken to overcome