By Kate James
According to an ABC article of 27 July 2017, the latest Tax Office figures show there are now more than 800,000 trusts with assets totalling more than $3 trillion.
Since trust funds are now so common, many people have to deal with them as part of their property settlements. But what exactly is a trust and how does it operate?
Here’s a quick breakdown of the basics:
What is a trust?
- A trust is an asset holding vehicle. Trusts may be created when someone dies, or be a ‘discretionary trust’ created for a family or business.
Why set up a trust?
- Firstly, the rules around trusts mean they can minimise the amount of tax payable.
- Trust are often established to control how beneficiaries to a will receive their inheritance, i.e. a regular drip-feed of cash, perhaps with strings attached. This is often set up where you wish the beneficiaries to receive income benefits, but not necessarily control the assets.
- Farmers often establish trusts to ensure that if one of the kids gets divorced the farm isn’t lost or split up in the property settlement.
- Business owners can use trusts to shield their assets from creditors.
How does a trust minimise tax?
- Often the main point of a trust account is to minimise a family’s total tax bill. A family trust doesn’t pay any tax itself, but it must distribute its income to either individuals or companies. The individual or company must then pay tax at their appropriate tax rate, taking into account of the extra income earned through the trust.
- This practise is known as income splitting, or streaming. What it means is that high income earners in the family direct their earnings into a trust. The trust then allocates that income to beneficiaries with the lowest income, who will pay the least tax. Beneficiaries may include children (over 18), or retired parents.
Do trusts make sense for everyone?
- Trusts tend be used by high income earners, because you need a fair amount of money to make the set-up and administration costs of a trust worthwhile. Generally, an income of $300,000 or more would make a trust cost effective.
Changes to trust tax law?
- The Australia Institute has calculated that the Government loses as least $3.5 billion a year in tax due to income splitting. Unsurprisingly the Government is keen to reform the laws around trusts to get this extra income into the budget. What these changes will look like is not clear yet, but it won’t involve getting ridding of trusts altogether.
What happens to trusts during family law settlements?
- The law around trusts is complex and it can depend on whether the trust is a family trust or set up as part of a business. Every trust has its own deed, which create rules around the trust that may impact your property settlement. It’s always best to get advice regarding trusts when considering separation and before finalising a property settlement.
- If you’re considering separation or divorce, we recommend you come in and speak to one of our lawyers about the effect of the law on any family or business trusts. Call us on (02) 6223 2400 to make an appointment.
To read the whole article, see http://www.abc.net.au/news/2017-07-28/trusts-and-tax-minimisation-explained/8752480
Please note our blogs are not legal advice. For information about how to obtain the correct legal advice, please contact Alliance Legal Services.