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WHAT IS A FAMILY TRUST? To put it simply, a trust is a relationship whereby property is held by one entity for the benefit of another. A family trust is a type of discretionary trust, named as such as distributing income or capital from the trust is entirely at the discretion of the trustee, both as to who shall receive a distribution, and as to what or how much. Each family trust will have: A trustee: the trustee is the person who holds trust property in their name for and on behalf of the beneficiaries. This may be one or more individuals or companies. They manage the trust and elect who and what and how much of the trust property will be distributed to the beneficiaries. A named or specified beneficiary: the named or specified beneficiary is the central person or persons in which all other general beneficiaries need to be related to to qualify as beneficiaries of the trust. Beneficiaries: these include the specified beneficiary and also anyone who by definition within the trust deed is a relative of the specified beneficiary. Any beneficiary is able to receive a distribution of trust income or capital if the trustee so decides. An appointor: this person has the right to hire and fire trustees and often must approve any amendments to the trust deed. It is these two roles that see the appointor as the ultimate controller of the trust. Trust property: there must be trust property for the legal relationship between the trustee and the beneficiaries to exist. Property may be anything of value (real estate, a contractual right, money, shares, intellectual property, even goodwill). Without any trust property though, the trust will immediately vest (end).
Quite often one person or a couple might perform several or all of these roles. But there will need to be a person listed in each role for a family trust to validly exist. A family trust is almost always governed by a trust deed setting out the relevant roles and responsibilities and powers of the trustee and the way beneficiaries may receive or deal with the trust property. A trust is also governed by certain legislation, but generally the terms of the trust deed will apply in priority where conflict arises between the two, except in relation to taxation or criminal penalties.
HOW DO FAMILY TRUSTS WORK? The trustee holds the trust property in his, her or its name for and on behalf of the beneficiaries. This may include the trustee running a business for the trust, investing money, simply holding assets or any combination of these things. A trustee may at any time elect to distribute either income or capital to any beneficiary they so choose. They do this through a trustee declaration setting out who will receive what proportion of income each year. This is completely to the discretion of the trustee and is not dependent on any one person getting any set amount or everyone receiving an equal share. It is instead entirely up to the trustee to pick and choose who receives what.
advantage of the lower marginal tax rates each enjoy rather than one taking all $100,000. In 2010, Sandra goes back to work and earns $40,000 in her own name. Therefore, to again minimise taxation, David could declare that in this financial year he will take $70,000 of the $100,000 trust income, and give Sandra $30,000 (taking her taxable income to a total of $70,000 in that year). In 2011, Sandra and David have a son named Jeremy turn 18. Jeremy goes to College and does not earn any income. Assuming Sandra still earns $40,000 in her own name from her employment, David as trustee might declare for tax purposes that he and Jeremy each take $45,000 each (since Jeremy, despite not being a named beneficiary but given he is a relative of the name beneficiaries he is still entitled to participate in the trust) and Sandra will earn the remaining $10,000 of trust income in addition to her $40,000 salary. The above is a perfect illustration of the tax effectiveness of a family trust in minimising a family units marginal tax rates and hence their overall tax paid.
An example of this illustrates the advantages of this structure: Assume David is the trustee of a family trust of which he and his wife Sandra are the named beneficiaries and that each year the trust makes $100,000 net income. In 2009 David could declare that since neither he nor Sandra worked, a $50,000 split each is best for tax purposes, taking
IMPORTANT DISCLAIMER: This document does not constitute advice. Clients should not act solely on the basis of the material contained in this document. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly and we therefore recommend that our formal advice be sought before acting in any of these areas. This document is issued as a helpful guide to clients and for their private information.
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WHAT ARE THE BENEFITS OF A FAMILY TRUST? Asset protection: Assets that are held in a trust cannot be taken by a creditor if the trustee becomes bankrupt or insolvent as the trustee is not holding the assets for his/ her own benefit, but for the beneficiaries of the trust. Even if the trustee is a beneficiary of the trust the “interest” they hold cannot be taken by the creditors if they become bankrupt. Similarly, in the event of a breakdown in marriage or de facto relationship a beneficiary’s interest in a trust, whilst no longer fully protected, is still harder for Courts to access than if held in a person’s own name.
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Simple: A family trust is fairly easy to set up and has much lower compliance costs involved than other asset protection structures; Tax benefits: As set out above, a family group have the potential to minimise income tax and to assist or avoid capital gains taxes via a trust. Estate planning: The ownership of the assets will not change even in the event of death; it will continue to be held by a trustee Flexible: A trust deed can be tailored to the needs of principals and beneficiaries and has the scope for some minor administrative amendments following setup.
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