Would your family benefit from a trust?

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Last year, Opposition Leader Bill Shorten threatened to crack down on family trusts being used to avoid taxes.

He vowed to impose a 30 per cent tax on distributions to family members in a trust.

So, what is a family trust? Sounds like something we would all like to have.

But the truth is they are complicated structures and only of real value to those with substantial wealth through a variety of diverse assets and businesses.

According to The Australia Institute, 2017 Australian Taxation Office (ATO) figures suggest there are 800,000 trusts with assets totalling more than $3 trillion and which are costing the Government $3.5 billion in foregone tax income.

Trusts are umbrella funds where assets and the income they generate are placed to make it easier for an accountant or financial adviser to help manage the various taxes and other regulations that apply to different assets.

They are not cheap to operate, which is why only investors with assets generating considerable wealth (which goes back into the trust) can afford to have them.

People set up family trusts to legally protect assets in cases where relatives divorce. It is difficult for Family Law to crack open a trust to retrieve proceeds demanded in a settlement by a divorcing spouse.

Trusts are also sometimes set up to bolster the income of older parents or young adult children at university, for example. Children under 18 years of age are generally ruled out from being trust beneficiaries.

They can also be used to play favourites among adult children. A family trust dictates who the beneficiaries are and unless you are named in the trust, the law is clear that you cannot benefit from the assets within a trust.

And of course, a trust is quite handy for minimising tax. By applying a formula that takes into consideration the person in the trust with the lowest income and thus the lowest marginal rate, it helps to bring the tax burden down across all the assets. It serves like a type of income-splitting mechanism, except wages cannot be paid into the trust, only earnings from investments and businesses.

The ATO has tried its best to explain the myriad of complex rules that govern family trust structures, but it remains mind-boggling for most of us. For example, read this explanation of when a spouse is or is not allowed to benefit from a family trust:

The spouse of the deceased specified individual will continue to be a member of the family, provided they were the spouse at the time of death. If the spouse of the deceased specified individual or a member of their family becomes the spouse of a person who is not a member of the deceased specified individual’s family, the spouse will cease to be a member of the family. Instead, the former spouse of the deceased specified individual or a member of their family becomes a member of the deceased specified individual’s family group. This means that the former spouse of the deceased specified individual won’t have concessionary treatment under the income injection test.

Much of the governance around family trusts involves having a ‘family trust election’ (FTE). This peculiarly worded term refers to the principle around which the trust is built … somewhat like the keystone that holds everything together. Officially, they are known as the ‘test person’.

To be part of the trust, you must be directly related to the FTE or married to someone who is. A trust can continue to operate for family members even after an FTE dies.

Have you ever considered setting up a family trust? Do you agree with the Opposition Leader that wealthy families should not be allowed to minimise their tax by using trusts?

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Written by Olga Galacho


Total Comments: 18
  1. 0

    Family trusts are a way of paying the costs of your family members without paying full tax. Wrong on every front – the ordinary income earning family unit pays tax first and foremost.

    Simply not good enough.

    • 0

      Family trusts are more likely to be set up to stop gold diggers getting people’s money in divorces etc. My kids have them for their kids.

    • 0

      As long as that’s all they do, fine – so we agree that the boundaries need to be tightened so as to preclude tax dodging.

  2. 0

    I’m not sure I understand what makes the Family Discretionary Trust so expensive as the article implies? Its just a contract between trustees and beneficiaries with the usual ATO reporting. It’s not as complex as a Superannuation Trust, which has a continual myriad of changes. I personally think the FDT should become more popular, but then I also believe in income splitting with spouses. If mum earns $100k and dad earns $60k shouldn’t they be taxed on $160k? My understanding is that children can get a trust distribution if they work in the parent’s business?
    As far as asset protection is concerned, I think there may have already been cases proving they are not as tight as Fort Knox.

    • 0

      Because individuals are taxes separately and not as a family unit. Therefore five year old Sammie can go to primary school with an income of less than the tax free threshold per annum, pay no tax, and the trust fund will be reduced by the amount of the tax free threshold for tax on it.

      At the moment – that’s 18,200 less taxable income for the trust and a free ride for Sammie…..

    • 0

      In other words – re my first post (but not my last post yet) – Sammie’s ‘running costs’ are fully paid for out of the family trust tax free.

      Hardly the same as Jo and Joe Bloggs and their five year old Sammy – Jo and Joe pay full tax on all income before Sammy gets one cent.

    • 0

      I think you would struggle to convince the ATO that a 5 year old is working in the family business.

    • 0

      Trebor, if a child , ie, under 18 years of age receives more than $466 p/a from a Trust Fund or other means, they are liable to pay tax at the rate of 66 cents in the dollar.

  3. 0

    Great explanation Olga – yes I would have to agree that it is not good enough that such trusts are used for tax minimization purposes. How long has this been happening? I have heard of trusts (the existence of) for many years, through administrations from both sides of politics. Methinks that if they were so nefarious, that either the Hawke/Keating or Rudd/Gillard/Rudd would have done something to either negate their effectiveness, or eliminate the practice – one wonders why that hasn’t happened?

    • 0

      Vested interest, Big Al – one clear reason why persons above a certain net wealth should not be permitted to hold the reins of government – conflict of interest arises at every corner.

    • 0

      I disagree Trebor – why should someone who has been successful be disbarred from leading a country? That is just silly – most sporting teams have their best player as captain, for a very good reason – to inspire the rest of the team to perform to its best capability. Why should politics be any different? I don’t want us to be all dragged down to the lowest common denominator – surely we are all on this planet to strive for the very best we can achieve? If not, what is the point?

    • 0

      Good comeback Big Al! And so true!

      I suppose one of the reasons for your favourite PMs not doing anything is that they cannot. A trust is a legal contract which involves money or some other item of real property being held by a person (trustee) on behalf of other people (beneficiaries). Without such a government approved/registered contract we would have a world war.
      Bill Shorten is only using this concept to promulgate class warfare. He knows full well that most trusts are set up by mums and dads who aren’t mega wealthy.

    • 0

      The problem with your theory, Big Al, is that we are NOT getting quality politicians. ”Successful” is more likely to mean ”born rich” or ”good at exploiting” or ”corrupt”… very seldom does it suggest ability or competence, much less diligence or the intent to do what is good for the nation.

      I agree with Trebor. In fact, I think we would do far, far better with working-class battlers at the helm!

  4. 0

    If 800,000 trusts were paying their fair share of tax. 330,000 pensioners needn’t have had their part pensions stolen.

    • 0

      True, Mad as hell. But then, 330,000 pensioners DIDN’T need to have their part pension stolen, because the government can apparently afford to give away – through tax cuts for the well off – more than the total it spends on all pensions, Newstart, and a host of other welfare initiatives. The policies have nothing to do with need and everything to do with unabated GREED.

    • 0

      The theft of promised entitlements was purely ideological. I’m beginning to be very surprised at the way the ALP jump into bed with the LNP in voting for a lot of these sorts of anti worker legislations.

      It is beginning to look like collusion and deal doing is going on between two gangs of people in it for whatever they can get and to Hell with the consequences.

      We should enjoy our say now because it could soon be illegal to criticise at all on forums like this.

      The first part of that betrayal was to have a go at the unions and also break the no disadvantage rule. Those pensioners had handed over their lump sums and could not change anything at all unlike the 330 000 who, unless locked into annuities, could alter their arrangements.

      In breaking that no disadvantage rule any legislation after is fair game.

  5. 0

    Whoopy. The rich can protect themselves and their kids from gold diggers but the less than wealthy have to split their assets 50/50. What a great excuse for a very unfair system.

    • 0

      Teddyboy, if you think in terms of economies of scale you may have a different opinion? A trust is cheaper to have than a Super Fund, in fact its cheaper than insuring your car. Would you complain that your neighbour is paying more to insure his $100k BMW than you are to insure your $40k Holden? If you’re worried about hanging on to your assets then get a quote and see if its worth insuring?



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