Set up a Family Trust or not?

You could read up some more on what different trust structures deliver in terms of advantages and also additional costs (http://www.trustmagic.com.au/ is great for this – very small investment for a whole lot of information – there are plenty of ideas in there on how to leverage trust structures harder than what you generally hear about and if you pull your credit card out you could be reading about them pretty well straight away as you can download it as an ebook).

You could crunch the numbers based on the knowledge you gain from your research and look at the decision from a purely financial perspective ignoring risk etc.

Finally, you could & should find an accountant and/or lawyer knowledgeable in these structures and pay for some professional advice as there are lots of variables, including your personal risk appetite, the risks you run in your employment, family situation etc, etc which go into making this kind of decision. For example, if you water plants at a nursery for a living then your risk of being sued for professional negligence is probably a lot lower than if you are an accountant providing trust structure advice to a property investor, so the value of using trusts for risk management is correspondingly lower. Professional advice is cheap compared with what you can blow if you get it wrong, so don’t skimp. I’d pay $500/hr for the best every time over $300/hr for an also ran – just the $1000-$1500pa running costs of a trust make 45mins advice a bargain.

Before you take advice from a professional try to educate yourself to the level that you know what you are asking them and why.

Hi Terry, in your opinion, what are the advantages of a Discretionary Trust versus buying in one's own name?

Legal Complexity
Tax complexity

  Thanks guys

Not really correct.

A company is a separate tax entity to a trust. Each is a separate person for tax purposes and has to file its own tax return.

If your company makes $50,000 profit and a trust looses $50,000 from negative gearing, the company income can't offset the loss of the trust with the net result an income of $0.

What will happen is the company has to pay tax of 30% of $50,000 ($15,000) and the trust's loss has to roll over to next year to be offset by any positive income. If none it keeps rolling over.

Companies also cannot distribute income flexibly like you have mentioned. The company would have to employ you to distribute money to you, or you would have to own shares and get a dividend. The same with the kids, but depending on their ages they may be taxed at around 66% on unearned income.

Maybe your company is a trustee of a trust??? This would be different. Your company would only be acting as the legal owner and it is really the trust that is running the business.

if this is the case then it would be dangerous to put the investment property into the same trust as the business. but if you did the loss of the property could be used to offset the income of the business because it is all with the same tax entity.

A better way to do it would be for the trust to own shares of the company with the company operating in its own right (not as trustee). Shareholders generally cannot be sued for actions of the company. So when the company operates, it is run by the husband (keep wife out of it) with a small wage paid to the husband, expenses taken out and then the profit distributed to the trust.

It may even be wise to have a separate trust to own the property and a different one to own the shares. The first trust would make a profit and then this would be distributed to the second one.

Also you should note that adults can earn up to $16,000 pa tax free now and kids around $3,600 pa tax free.

all this needs careful set up – and implementation as there a lots of issues such as family trust elections etc.

Hi Pootie (again),

Sorry – I meant to also say that I can’t comment on the trust structure that you are proposing – I’ll need to leave that to someone more expert – I’m just saying be careful around the personal services income.

JJ