As published in The Q Review Summer/Autumn 2021 Magazine. Follow the link to Subscribe and receive your FREE copy each quarter!
In Part 1 of this series, we introduce the key benefits Trusts can provide when it comes to tax minimisation, asset protection and succession planning.
Today, we look to improve your understanding of how a Family Trust works…
Who Owns a Trust?
Great question, but when it comes to the most common form of Trust, a Family Trust (technically known as a Discretionary Trust) the answer is – no one!
That is one of the beautiful characteristics of such a Trust, and why we use the term ‘control’ in Part 1 of this series, rather than ‘ownership’.
No one owns a Family Trust, instead individuals (or more often companies) are appointed to positions of power and responsibility regarding the operation and management of the Trust.
There are generally four key positions within a Family Trust –
The Settlor creates the Trust in the first place.
But under Australian tax laws, for the Trust to be tax effective, the Settlor is not permitted to ever benefit from the Trust they create.
Therefore, you must seek out an unrelated party to act as the Settlor of your Trust.
When we establish Trusts for our Clients, one of our Team will offer to act as the Settlor. And the terms of the Trust will always include an express rule that the Settlor may never benefit from that Trust once established.
The Trustee is the individual, individuals or company that is entrusted with holding the assets of the Trust and conducting and managing its day-to-day activities.
The Trustee also takes on the responsibilities, obligations and liabilities associated with the Trust activities.
Getting the selection of the Trustee right is vital to ensure your Trust works as intended and that the various benefits of having a Trust can come to fruition.
While there are some additional costs to having a company act as the Trustee of your Trust, it is always our preferred and recommended course of action.
The Appointor is often referred to as the metaphorical ‘God’ when it comes to a Family Trust as they are considered to be the ultimate controller.
And to a large extent this is true because the Appointor is given the power to fire, and replace, the Trustee.
But that is largely their only role.
This means day to day control lies with the Trustee, and if the Trustee does something within their powers (granted to them under the rules of the Trust), the Appointor has no authority to override or otherwise change things.
If a dispute was ever to arise, the Appointor must act without delay to remove the Trustee before any damage could be done.
As you would expect, these are the people, along with other family group Trusts and companies, who may benefit from the Family Trust.
All the other roles are in effect undertaken in service of, and for the benefit of, the Beneficiaries.
Typically, when establishing a Discretionary Trust we attempt to include as many family members, Trusts and companies as possible within the list of potential Beneficiaries.
This provides the absolute maximum tax planning flexibility.
The good news is, there are no down sides to casting such a wide net, as no Beneficiary has any rights, nor can they call on the Trustee to make payment to them, until the Trustee decides to make a distribution to them.
Trusts and in particular Family Trusts are one of the most powerful structuring tools available when it comes to minimising your tax, protecting your wealth, and securely and intelligently passing that wealth onto the next generation.
Contact me, Kapil Bhasin – Director / Chief Tax Saving Strategist / Senior Client Manager, today to arrange your FREE, No Risk, Initial Consultation to discuss how a Trust could benefit you and your family.