As we celebrate another Mother’s Day we are reminded again of the importance of family, and the guidance and support our parents have given us over the years. Many of us will remember the thrill of having our first savings account and watching our pocket money grow until there was enough to make that special purchase. It was a small glimpse into the world of adulthood and managing our money to achieve important goals. We have put together this article so that you can be armed with all of the knowledge to help consider if a Family Trust might be an option for you, introducing; Family Trusts + Trusting Family – Expert Accounting l Canny Group.
Family trusts work in a similar way to a parent opening a bank account for a child. While that account and the money in it belong to the child, the parent is the person responsible for and ultimately in control of the account. In a family trust, the role of the parent is undertaken by the trustee.
This Mother’s Day we would like to shed some light on how setting up a family trust could be a better option to diversify your portfolio which not only saves you from massive tax bills but also safeguards the interest of your kids and your assets.
What Is A Family Trust?
Family trusts are used to hold assets or to run a family business and are usually established for asset protection or tax purposes. They manage assets and support beneficiaries – usually immediate and extended family members – and help to ensure that assets are protected and remain in the family over time. A family trust can hold more than one asset – such as real property and company shares. Cash is also a suitable asset.
Family trusts are discretionary, meaning that the trustee has the power to decide who are the beneficiaries of the trust’s net income and capital gains.
The trust is governed by a trust deed, a legally binding agreement that sets out the terms and conditions of that trust.
The Financial Information for Setting It Up
To form a family trust, a settlor – who must be independent of the family and beneficiaries (such as a solicitor or accountant) – gives assets or money to the trustee and signs the trust deed. This is their sole involvement in the matter.
An appointer – who is usually the person who decides to set up a trust initially – appoints a trustee (which can be an individual or a company), who/which is responsible for conducting the trust and managing its assets. However, the appointor and trustee can be the same person.
While an agreement between family members may be seen as an informal affair and something that can be easily established, this is not the case. A family trust is a complex legal agreement that is subject to significant rules and regulations and governed by complex legislation. It is important to get professional accounting, financial or legal advice before acting – all of which Canny Group house under the one roof.
Tax Law for Appointer + Trustee
While the role of appointer and trustee can be amalgamated, having a separate appointer provides a level of protection for the trust. An appointer has the authority to dismiss a trustee, as well as appointing one, so if a trustee is proving inadequate or inefficient for any reason, the appointer can dismiss the trustee and appoint a more suitable one.
Even if the trustee is performing well, the appointer has the power to veto some of the key decisions the trustee might make, such as amending the trust deed or changing beneficiaries. A separation of the key roles of appointer and trustee gives some objectivity and brings a different set of eyes to managing key issues dealt with by the trust.
Accounting Systems for Income + Taxation
For tax concession purposes, a Family Trust Election must be made to the Australian Taxation Office – this is a confirmation that every beneficiary in the trust is related to a particular individual.
A trustee can distribute income earned by the trust, from the trust property, in any way they wish to as long as distributions are made to people who qualify as beneficiaries under the terms and conditions of the trust deed. They do not have to make trust distributions of the same amounts or in the same way in subsequent years.
A family trust is not required to pay tax on income that is distributed to beneficiaries, but it does have to pay tax on undistributed income each year, t the top marginal rate. Beneficiaries must pay income tax on money distributed to them, subject to income tax thresholds and other assessable income they may accrue. Penalty rates may also apply to distributions to minors.
An additional tax benefit of family trusts is that they allow distribution of funds to a separate company as. means of coping the tax rate at a lower amount. There are also capital gains tax advantages.
These tax implications and requirements highlight the need for trustees and beneficiaries to seek relevant professional advice.
Your Financial Plan for Making The Most of The Key Benefits
In addition to the above tax benefits, others include:
- Asset protection – assets help within the trust do not form the part of a deceased estate, they are protected from challenges to. Will or from a child’s spouse claiming a share of an inheritance, and from the event of a family member’s bankruptcy or insolvency
- Long-term financial support for children and grandchildren
- Distribution of assets to future generations
- Protection of beneficiaries who may not be financially astute and may make unwise financial choices
- The flexibility of distribution amounts from year to year
- Unlike superannuation funds, family trusts allow investment in property
- When set up correctly, they are clear family trust tax benefits for individuals and businesses because the trust itself does not pay tax, beneficiaries are taxed based on the amount of income placed in their name (as well as any other income they may have from other sources)
A family trust allows you to distribute profit amongst family members to utilise their income tax “tax-free threshold”. If the business’ profit grows too large to distribute effectively, a family trust can also distribute to a separate company to cap the tax rate at 27.5%.
Trusting the Accountants Geelong turn to for help!
As you celebrate Mother’s Day this year and reflect on what family means to you and yours, it may also be beneficial to look at whether a family trust can assist with the financial wellbeing of your family, as a way of accumulating wealth for retirement and protecting family assets – in whatever form they may be – for future generations.
Get in touch today to find out why we are the accountants Geelong turn to for trusted help!