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If you’ve worked hard to pay off your mortgage and still have some surplus income, you might like to consider setting up a trust. With a family trust you can share your hard-earned assets with your loved ones even past your life time.
Trust funds are often perceived as a tax avoidance mechanism reserved for a wealthy few.
However, according to recent Australian Taxation Office figures, most of the nine hundred thousand or so trusts are family trusts operating with under two million dollars.
Liam Shorte, a self-managed super fund specialist at Sydney-based Verante Financial Planning, explains.
“Trusts are an entity whereby you can put money into them and you can have the income or the capital spread out to family members or to others over time rather than having the assets just in your name, and earning the income on the capital gains in your own name. So for many people, they will look at the common discretionary trust or family trust, and the ideas with that is that they put some of their wealth in there and they use that to fund income for their children or grandchildren or other family members.”
It’s common that migrants who’ve built a lifetime of savings may now wish to give their grandchildren a good start in life.
“If they’ve built up their wealth, they move some of it into the trust. That may be invested in property or shares or any sort of asset and then each year the income from that trust they can decide on how it’s distributed among the beneficiaries of the trust. The good thing is that they still control the trust. They have full say in what happens to the money and they can decide each year which beneficiary receives any of the distributions from the trust.”
Shorte often sees grandparents who want to take care of their grandchildren’s tertiary or secondary school fees.
“For example, you may have a grandchild who’s eighteen and going to university, you may be able to allocate thirty thousand of income to them during that year to pay for all their expenses and it’s taxed as if it was earned by that individual in their own name so it’s at the lower tax rate. Whereas, if the grandparents or… I have the ones who are tilers or painters, people who are professionals. Their own marginal tax rate is very high so this is just a good way of having some of the income from their investments go to the next generation taxed effectively.”
But how much do you need to put aside to establish a trust?
Shorte reckons you need at least half a million dollars to make it worthwhile.
Whereas, South Australia-based David Garry whose company ABN Australia has been registering trust funds for forty years, has a lower threshold of two hundred thousand dollars.
“You must remember that in establishing a fund or a trust there are costs associated with it. If you have an independent trustee such as an accountant looking after the affairs or a solicitor or the public trustee, there are fees charged for the administration of them so you want to make sure that you don’t set up a trust and put in a hundred thousand dollars and then that’s eroded by management fees by the trustee or administration as such.”
Trusts generally last 80 years in most Australian states and territories except for South Australia.
“Most of time they are established by a person who is called a ‘settlor’ and it’s usually only ten dollars is used to set one up as a gift from a person who’s not related to any of the beneficiaries or future beneficiaries. It’s actually a document referred to as a ‘trust deed’ and there is a ‘trustee’ appointed and then the ‘beneficiaries’ are usually stated. Sometimes, they are not, but it is common to say that the beneficiaries are the children of primary beneficiary.”
Whilst whom you assign as trustees is important, Liam Shorte believes the most crucial position in a trust is the ‘appointor’.
“And that’s the person who appoints the trustees and hires and fires the trustee and makes the decision who will control the trust so it’s really important to get the ‘appointor’ positions correct and make sure that power passes to the right people through your lifetime.”
The last Census shows that a third of Australian business owners were born overseas.
If you happen to be one, David Garry says it makes sense to set up a family trust as you start out.
“They really need to seek advice in regard to how best to protect the business assets to segregate them from the family home and allow them to have an equitable distribution to family members so that you have a reasonable tax base.”
David Garry explains how discretionary trusts work for family businesses.
“Say, you were going to go into business and you went to a bank and borrowed a hundred thousand dollars. They may lend it to you and the security may be your home. So, in turn, you would then put that one hundred thousand dollars into the trust as a loan to start and commence the business operations. The trust itself will then be the business structure and would start to run all of the sales and expenses through that, and at the end of the year, any profits made for it have to be distributed to the beneficiaries, usually mum, dad and the children.”
To ensure that assets are used appropriately, some baby-boomers prefer to spell out specific instructions.
“A common way to do that is through the will where you have a testamentary trust set up in the will which then provides specific rights and issues in regard to how the assets are to be dealt with.”
Living irrevocable trusts are another common type of trust where you can transfer assets into a trust whilst you are alive and have it managed by a trustee for the benefit of other beneficiaries providing that certain conditions are met.
“As an example, you may have children that have turned out to be dependent on drugs so you might want to assist them but control the use of funds so that they don’t blow the whole lot if you give it to them in one hit.”
And if you intend to gift part of your assets to beneficiaries out of Australia, Shorte notes that the Australian government doesn’t allow overseas residents to receive income from a family trust.
“So what we’re seeing a lot of people doing now is they will exclude foreign beneficiaries from their trust. So while the child is overseas, they are specifically excluded from any benefit from the trust. The income asset of the trust can only go to people who are living in Australia.”