By Westcourt Blogger. The use of a discretionary trust (often called a “family trust”) for families in business is popular in Australia and for a good reason.
Income tax! Capital gains tax!
And tax is one of the many good reasons why many of our Perth based, commercially focussed families in business use a discretionary trust. But there are a lot of additional reasons why trusts will continue to be popular.
When your family business affairs become significant the world becomes interested in you and your family. And keeping your affairs under the radar from the press and the world is important not only from a social perspective but also from a business perspective. Do you really want your key customers to know your net profit after tax? Are you a leader in your target market and your ratio’s become a benchmark?
If you operate using a company, and your affairs are significant, you must become audited and you must make your sensitive financial information to the public. This public record applies not only for Perth-based families, but also Australia wide.
Family trusts do not suffer from this requirement.
Preserving your legacy
Often the definition of a family in a family trust deed is quite large – typically including your parents, grandparents, brothers, sisters, children, grandchildren, nieces, nephews and all of their spouses.
However the definition is entirely at your choice.
If you choose for the definition of family to only include your direct bloodline, and expressly exclude spouses of your children, then your trust deed will begin to act as a legacy with protection from the family court. There are a lot of other things to consider with regards to how the family court act, including the way it was operated in practice, but legacy trusts, or lineal descendant trusts, are a start to protecting future assets.
The benefit of a family trust is that the trust assets are owned for the benefit of the family as a whole. So if a family member becomes bankrupt, dies or is not of capacity, the trust asset is not affected.
A family trust is a relatively simple tax vehicle to operate. It is not considered an investment by itself (unlike a SMSF) so the regulation applied to family trusts is much lighter than other entities. You are not required to engage a financial product advisor to assist in a family trust.
It can cost around $300 to create a family trust through an online law firm and the fees for maintaining a family trust start at around $900 a year (but can increase greatly depending on the business and the complexity of the family trust assets).
Of course the decision on making the family trust structure work best for you is much more complex. However the take-away is that the starting fees are low.
You can lend as much money as you can into a family trust. So for families with large investment assets who are unable to contribute more to a superannuation environment, a family trust is ideal as it is flexible in accepting assets.
The ability of a family trust to support children and different family members at different times is unlimited. Each year the trustee can choose which family members should benefit from the trust. And the choice, once made, does not affect your ability to change the choice in later years.
So if a child is working in the family business, and decides to not work in the business later on, the trustee can simply choose to stop the child receiving benefits from the family trust.
Your family trust is not part of your estate so it is not governed by the wishes of your will. And this opens opportunities.
A will is very prescriptive in its nature and it is very exact. So quite often, for dynamic families, a will becomes quickly redundant.
If your intentions regarding the future direction of your estate require flexibility for changing business conditions you will typically have a family charter directing the family how to act in the future. A family trust can operate in sync with the directions of a family charter with the role of trustee overseer and trustee both looking to the family charter to operate the trust.
The creative use of multiple trusts for different branches of a diverse family allows for incredible opportunities for those who are focussed in this area.
No restriction on investment choices
Other business structures, like a SMSF, are restricted in terms of what they can and cannot invest in. These restrictions are put in place by the Tax Office or by the financial product advisors who only have a limited number of options available for their clients.
A family trust can invest in any type of asset it wants to make and for whatever reason. So if the family trust wants to lend money to your brother, buy a holiday home or invest in Bitcoins: it can (subject to the deed which generally allows for this).
Early access to funds
If you inject funds into a family trust for future wealth planning, and circumstances change, you can withdraw those funds immediately. This compares to a superannuation environment where you have to satisfy certain conditions (like being old enough) to access your money.
Each family trust is considered a separate “person” in Western Australia for land tax purposes. And with marginal rates of land tax applying to land holding persons a family trust can also generate a reduction in land tax payable by a family.
The important take-away is that family trust can do a lot more than save you tax (and they do that well). So if you are considering a family trust make sure you go over all of the aspects with an advisor who is independent and has a focus on families in business.