The majority of people tend to navigate life according to a set pattern. They start off by going to school, then they earn some credentials, then they find a job, then they pay their taxes, and finally, they have a family. Many people choose to expand their money and assets by beginning or increasing existing businesses during this period of time.
They have the option of owning that money and those assets in their own name, or they can set up an alternate structure such as a family trust to hold them with the help of a financial advisor. A structure like this one could be helpful for tax planning, protecting assets, and securing favorable tax treatment.
In this article, we explore both the benefits and drawbacks of establishing family trusts.
What exactly is a family trust?
In Australia, the wealth and assets of a family are often held in what is known as a “family trust,” which is a discretionary form of trust. In addition to that, it is frequently utilized as the framework for family-run companies.
A trust is a type of legal organization in which one individual (the trustee) owns the legal title to a piece of property for the benefit of a group of beneficiaries. The Beneficiaries are entitled to their share of any earnings that result from the trustee’s management of the property, which comes with a broad variety of authorities to exercise. Learn more when the cost of living becomes unsustainable.
One variation of the concept of trust is discretionary trust. The trustee has complete autonomy over the decision of how much money, if any at all, to transfer to each beneficiary, making this characteristic the one that stands out the most. The beneficiaries do not have a guarantee that they will be paid; rather, they only have an expectation that they will be paid.
The beneficiaries of family trusts are often other members of the same family, and the trustee of a family trust will either be a member of the family or a firm that is managed by the family. This trustee has a great deal of leeway in a variety of areas, including the distribution of the revenue from the trust.
Let’s take a look at some of the benefits as well as the drawbacks of having a family trust.
Family trusts can be a useful tool for wealth management and asset protection. They provide flexibility in distributing income and protecting family assets. However, there are potential drawbacks to consider. One drawback is the cost involved in setting up and maintaining a family trust. It’s essential to find the cheapest SMSF setup option to minimize expenses and ensure long-term viability. Proper financial planning and expert advice are crucial to navigate the complexities of family trusts and avoid any potential pitfalls.
One important benefit of family trusts is tax planning.
When it comes to taxes, a family trust is subject to the maximum rate, which is 45%. However, the beneficiaries are responsible for paying taxes on any income from the trust that is transferred to them. This tax is calculated based on the beneficiary’s individual tax rate.
A financial advisor at Omura Wealth Advisers opined that it is normal practice to make use of a family trust in order to reduce the aggregate amount of income tax that a whole family is required to pay. In most cases, the trustee of a family trust will divide the income of the trust among the beneficiaries of the trust, with a greater portion of the distribution going to a family member whose income is subject to a lower marginal tax rate than that of the other beneficiaries. As a result, the beneficiaries pay a lower overall amount of tax on the income generated by the trust.
To Be Able to Carry Forwards Losses
A trust is not required to share its losses with its beneficiaries. Because of this, the trustees will not ask the beneficiaries to make any financial contributions to the trust in order to cover any potential losses. Instead, the losses that occur during one year might be carried over to the subsequent year.
Protection of Assets
A structure known as a family trust can shield your family’s money from the reach of creditors. When a person owes money and is unable to satisfy the standards for repayment, the creditor can often access the individual’s personal asset to collect the money that is owed to pay off the obligation. Personal assets include things like a house, a vehicle, and any other property that an individual owns in their own name. If the personal assets are held by a family trust, the beneficiary of the trust has no legal rights to those personal goods, and the beneficiaries’ creditors are unable to get access to the assets either. This covers the situation in which a beneficiary declares bankruptcy.
0% Capital Gains Tax Deduction
On any profits made from the sale of an asset, a tax on capital gains is due to be paid. A reduction of fifty percent on the capital gains tax is granted to a family trust for any profits gained from the sale of assets that the trust has owned for more than a year.
Family trusts have a number of disadvantages, including the following:
Family enterprises sometimes employ a family trust as their organisational structure because of its tax advantages. While this structure does offer benefits, such as those stated above, it does so at the expense of a business’s potential to expand. The high rate of taxation that is imposed to trust revenue that is not distributed nearly always compels trustees to disburse the income. As a result, the company will not be able to keep any of the earnings to use as capital for future investments in the company. When compared to other business structures like a firm, such as a trust structure, lenders such as banks are more hesitant to lend money to trust structures.
Can Also lead to disagreement in the family
It is not uncommon for members of a family to argue with one another. When a substantial amount of a family’s fortune is held within a trust, the possibility of a power struggle within the trust itself increases. Family disagreements are more likely to arise when the trust deed fails to provide clear instructions on how to nominate or change trustees and how trust income should be divided. In order to prevent disagreements of this nature, the trust deed has to provide detailed instructions.
The responsibility of the trustee
Beneficiaries receive superior protection from a family trust on several fronts, including from the viewpoints of asset protection and tax planning. On the other hand, a trustee is held legally responsible for the duties of the trust, which includes the trust’s debts. If the trustee is a human, this might put them at severe personal danger; hence, companies are frequently utilised in these situations rather than individuals.
Should you create a trust for your family’s finances?
The benefits of setting up a family trust are dependent on the specifics of your situation, you should get in touch with a financial advisor for professional advice on your own situation. If you want to find out if establishing a family trust may be beneficial for you and your family, you should consult with an attorney and a financial advisor who are not affiliated with you. Take into consideration the potential tax consequences that may result from transferring current assets to a family trust.