A family trust could save you
They’ve been around for quite some time. Those “in the know” set up a family trust years ago to benefit their family financially. But if you’re not a financial planner or lawyer you could be forgiven for just making a will and avoiding any other confusing wealth-related strategies.
Actually, a family trust isn’t as complicated as you may think. Sure, it’ll likely require a little professional advice. But the benefit to your family may be worth it.
A break-down might help.
A family trust (an “inter vivos discretionary trust” in law speak) is about protecting your assets and dividing up income to minimise the tax you pay each year.
The way it works is that assets (for example your business, or investments such as real estate, shares or managed funds) are owned by your trust – and the trustees (usually mum and dad) manage them. The income the trust earns each year can be given to family members (beneficiaries) in any way the trustees decide.
Because different tax rates apply to different people depending on their circumstances, the idea is that you effectively give some income (through the trust) to family members in lower tax brackets than you. They pay income tax on their bit, instead of you paying tax on the whole lot at a higher rate.
If you earn between $37,001 and $80,000 a year, you’re generally paying income tax at the rate of 30% for every dollar you earn.
But if you have a nineteen year old son at uni who isn’t working, and a partner who works part-time earning $20,000 a year, their rate of tax is far less than yours. You could allocate up to $16,000 to your son, who pays no tax. And your partner only gets taxed at the rate of 15% per dollar (after the first $6,000 that’s tax free).
In terms of your family’s wealth, that’s got to help.
Plus, a family trust can protect your family’s assets. If your business goes bankrupt, creditors could potentially get hold of your shares or property. Unless the trust owns them.
A family trust can also sometimes help keep your assets safe for your spouse and children after you die, or if they go through a relationship breakdown.
The new federal budget changed the rules in relation to trust money going to minors (18 or under). From July you’ll only be able to pay minors around $400 a year before you’re hit with penalty tax rates.
But the government seems to accept that family trusts can help with tax management, particularly for small businesses.
Obviously for maximum benefit you need to regularly update your trust. Circumstances can change, including your family members’ tax brackets.
For more information please see Testamentary trust or discretionary trust – which is best for you?