When it comes to protecting your wealth, there are few vehicles that can rival the family trust. From a tax perspective, a family trust can start delivering you more tax-free income.
But while a lot of people go into setting up a family trust with tax minimisation as a motivator, tax savings are just the beginning when you consider the peace of mind family trusts have to offer.
“What makes family trusts such attractive vehicles to hold assets in is their flexibility”
Trusts allow assets to be housed and passed from family member to family member or generation to generation simply by appointing new trustees or trustee directors, rather than trading assets between individuals, which can be costly and time-consuming.
Distinct from unit trusts or fixed trusts, in which individuals get fixed entitlement of the returns of the underlying assets including interest and capital gains tax charges, the family trust – otherwise known as a discretionary trust – can be changed depending on the needs of the family members as they arise.
The tax advantages that emerge as a result of distributing and structuring assets within the trust tend to be more of a by-product for the ongoing capital protection, preservation and portability benefits families ultimately get from a trust.
In terms of protection, holding assets in a trust rather than in the name of a family member can reduce the risk of losing those assets should the individual fall into financial trouble.
Pooling assets together can allow families to leverage off the strength of the whole portfolio, whilst able to equitably control how much individual family members receive, often despite the varying return profiles of the different assets within the structure.
Instead of one family member being left with an underperforming asset and another holding a high-performing asset, the trust can be structured to transcend cycles and long-term business decisions to reward family members for their contribution.
The trustee will decide how the income is distributed and who receives what but within a fully functional family trust, members who are directors of the trustee company will be part of the decision-making process as well.
There is a requirement to distribute the annual income among the eligible beneficiaries each year or if the trustee decides not to distribute the income, the trustee has to pay tax on the asset at the top marginal tax rate.
The trustee can assess how the investments performed during the year and the best ways to distribute the income.
For instance, the trustee can choose to distribute more capital gains generated by the assets of the trust to one family member who may be able to absorb higher than usual capital loss in any given year in order to neutralise that loss.
In another instance a trustee may pay out franked dividends to the family member in the lowest tax bracket because franked dividends are taxed at the individual’s tax rate and the liability might be little or none for family members outside of higher tax brackets.
It is also common for trusts to set up a company structure to receive distributions in order to cap tax on the contributions at the 30 per cent company tax rate, especially if beneficiaries are in higher tax brackets. To get money out of the company (beneficiary) requires loan agreements and interest payments which can be managed.
In situations where a family member passes away, the existence of a trust can make passing on control to family members much easier.
In the case of a trust, if a trustee company is 100 per cent owned by the family, it’s very easy for the family to make decisions during the handover.