Utilise a family trust

Trusts are established for a variety of purposes including privacy, estate planning, tax planning, pension funds, charities, investment trusts, and asset protection.

It is frequently misunderstood that a trust is a legal entity or person, like a company or an individual.

A trust is not a separate legal entity or person at all – it is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. This fiduciary arrangement allows a third party known as the trustee to hold investment assets separately on behalf of a person or business known as the beneficiary through a trust deed created by a settlor.

Types of Trusts

In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:

* Fixed Trusts

In essence these are trusts where the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.

*Unit Trusts

These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company. The beneficiaries are usually called unitholders.

*Discretionary Trusts

These are often called “family trusts” because they are usually associated with tax planning and asset protection of family members. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether any of them is to be entitled to income or capital and, if so, to how much.

*Bare Trusts

Where there is only one trustee, one legally competent beneficiary and no specified obligations, the beneficiary has complete control of the trustee (or “nominee”) and this is known as a bare trust. A common example of a bare trust is a nominee shareholding – where the shareowner holds shares on behalf of someone else who does not want to be identified.

*Hybrid Trusts

These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the Page 8 o trustee has power to issue.

*Testamentary Trusts

As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often established where the testator wishes to provide for their children who have yet to reach their adulthood or are handicapped.

*Charitable Trusts

These Trusts provide a vehicle for the establishment of philanthropic Trusts that are allowed concessional taxation treatment and deductions to taxpayers for gifts to such Trusts.

Superannution Trusts

All superannuation funds in Australia operate as trusts. The deed establishes the basis of calculating each member’s entitlement, and sometimes the contributions that have to be made for a member, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.

What are the benefits you can get from establishing a trust?

The tax saving benefits of Australian family trust include:

1. 1. Flexibility on income distributions. The trustee decides before the 30th June each financial year how that year’s trust income is to be distributed between the various beneficiaries. Generally, income will be distributed to beneficiaries in lower tax brackets.
2. 2. Ability to stream capital gains and franked dividends to specific beneficiaries. For example, capital gains should be streamed to beneficiaries with carried forward capital losses.
3. 3. Ideal structure for owning capital appreciating asset (such as land and shares) as the beneficiaries can access the 50% CGT discount on any realised capital gains (if the assets were owned for more than 12 months).
4. 4. Allows for succession planning and the transfer of wealth to future generations without immediate tax consequences.

How to utilise a Family Trust? 

1. 1. Familiarise the terms of your trust: It is necessary to be aware of the terms of your trust, as they include the exact requirements for income allocation. The ATO can assess your trust income at a higher tax rate if the exact requirements are not met.
2. 2. Map out the beneficiaries: List the trust beneficiaries and their other income, if any. This is to properly distribute most of the income to the beneficiaries with less or no income and take advantage of the lower tax bracket.
3. 3. Allocate the trust income through a distribution resolution: In order to control the total tax payable by the family, the income received by a family trust can be allocated to the beneficiaries before the end of the financial year (30 June) through a distribution resolution to avoid an ATO dispute.
   The Family Trust Laws have highlighted that if a trustee fails to make a distribution resolution for the trust income before the financial year ends, they can be assessed at the highest marginal tax rate of 47% by the ATO.

Conclusion:

You can save tax through a family trust if all the requirements are met and all circumstances are covered and planned properly.

Seek tax advice with us now to have a personalised discussion on your utilisation of family Trust to ensure that your financial position and goals are accounted for!

Click on the button below to sign up for an appointment now!