People set up family trusts for a variety of reasons. Some of the reasons include the ability to protect assets, tax minimisation and providing a way to fairly pass on wealth to children or grandchildren.
When you set up a family trust, you can safeguard assets from business creditors, pay less tax on income generated by assets, and ensure your family does not have to deal with the complexities of asset transfer in the event of your passing. Importantly, family trusts allow you to share wealth generated by your assets with those who matter to you most, now and into the future.
One of the most common questions we are asked by people considering setting up their own family trust is about the taxation implications for themselves and trust beneficiaries. To best understand this, it is important to get some background information first.
What is a family trust?
It is a separate entity that is set up to own assets and share income among a family group. Having a family trust lets you make a choice about which assets are worthwhile owning in a special vehicle that you still control.
There are particular rules about setting up the trust to ensure your wishes can be executed effectively now and in the future. It is important to get expert advice on this part of the process.
Why bother setting up a trust?
Income earned by assets owned outside of a trust structure can attract marginal tax rates or corporate tax rates. The trust structure gives you flexibility. It allows effective tax planning that may result in lower tax overall.
Assigning key roles
There are two key roles to consider when you are setting up a family trust. One is the appointor and the other is the trustee.
The trustee will make the day-to-day decisions about how to manage the trust. Some people appoint a corporate trustee rather than an individual. It is essential to choose the right type of trustee – corporate or individual – for your situation, so take time to discuss the options with your advisor before your make the decision.
Regardless of whether you choose an individual or corporate trustee, at the end of each year, the assigned trustee decides how to distribute any income generated by the assets. To avoid being too limited regarding who the trustee can distribute funds to, it’s important to keep trust deeds quite broad.
Our team works with trustees to ensure they take their responsibilities seriously. Each year we discuss key decisions regarding distributions with our clients. We find this annual conversation helps trustees better understand and manage their investment.
The second vital role is that of the appointor. The appointor can change the trustee at any time. This is a very powerful position so the choice should be carefully considered.
How does receiving an income from a family trust affect beneficiaries?
Each beneficiary will declare the amount awarded to them in their tax return each year. We work with simple to complex family groups to ensure that distributions are managed for the family group from a tax minimisation and financial planning perspective.
Family dynamics can be a challenge in this situation, so it is important to understand the drivers for each beneficiary and structure the distributions accordingly.
We have seen the benefits of using family trusts, but it is vital to have a clear understanding of the mechanisms and rules involved before you begin the process.
If you’d like to know more about setting up a trust to provide for your family’s future milestones, get in touch with CountPlus One. Our friendly team would be happy to give you advice you can count on.
The sixth Women in Focus webinar explored Goals-Based Investing versus traditional investing approaches, and helped you to consider how well equipped you and your family are with an investment strategy