Family (Discretionary) Trusts - Pros & Cons
You can use a family (discretionary) trust to facilitate investments, hold assets or as structure to facilitate the operation and ownership of a business. Trusts are often favoured for asset protection, family succession planning and the flexible distribution of income and capital.
Family trusts are separate legal entities and the assets of a trust are not beneficially owned by anybody but instead, are held in trust for the current or future benefit of potential beneficiaries and controlled by the trustee.
As the assets of a trust do not belong to the settlor, trustee or the beneficiaries of the trust this adds a layer of protection to the assets held by the trust.
An individual or individuals can be the trustees of a family trust but it is more common for the trustee of a trust to be a Pty Ltd Company, known as a trustee company. Individuals are appointed as share holders and directors of the trustee company and therefore have operational control of the trust.
Having a corporate trustee makes the process of changing trustees a simpler process by just having to add or remove directors from the corporate trustee. It also aids the estate planning process.
A trustee can borrow funds, operate a business, make investments on behalf of the trust and are bound to operate under a set of rules known as the trust deed, which is governed by the relevant Trust Act in each state.
There is a maximum life span of 80 years for trusts, at which point the trust must be settled with all assets distributed to beneficiaries and the trust ceases to exist.
Trusts can simply hold non-income producing assets for asset protection and future capital distribution purposes. A trust could also be a shareholder of another entity or hold income producing assets to be able to distribute income to beneficiaries at marginal tax rates, whilst utilising applicable capital gains discounts.
A trust can also operate a business, be registered for GST, have employers, declare income and claim expenses.
A trust trades for a particular financial period then reports income, claims operating expenses and declares a profit. This profit must be distributed to beneficiaries. In certain circumstances where the profit of a trust is not distributed, then the trustee will pay tax at the rate of 45%.
Beneficiaries must include any trust distributions in their personal or entity tax returns in the same financial year in which the distribution is declared by the trust.
Distributions to beneficiaries that are income of a capital nature is at the absolute discretion of the trustee.
A trust usually has a wide range of potential beneficiaries including existing family members, future family members or related companies or trusts as determined by the trust deed.
A trust must produce year end financials and lodge a tax return, including any beneficiary distribution details.
Advantages
- Asset protection
- Limited liability for potential beneficiaries
- Ability to distribute income to beneficiaries at marginal tax rates
- Capital gains tax discounts apply at the point of distribution to beneficiaries
- Small business capital gains tax concessions can apply
- Loans can be made to beneficiaries without deemed dividend implications
- Carried forward tax losses can be offset against future income
Disadvantages
- Tax losses can not form part of a distribution to a beneficiary and must be carried forward to following years
- All profit in any one financial year must be distributed to beneficiaries
- Land tax-free thresholds may not be available
- Life span of 80 years
- Distributions to non-resident beneficiaries attract the top non-resident tax rate of 45%
Disclaimer
This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.
