The Australian Tax Office (ATO) expects that in 2022 there will be over one million trusts in operation in Australia. There is good reason for this. Trusts can provide significant tax, estate planning and asset protection benefits. Trust deeds can be obtained quickly and cheaply online, so why bother involving your financial, tax or legal advisor in the trust creation process?
This article outlines some of the considerations relevant to the decision to establish a trust, as well as the benefits to seeking financial, tax and legal advice to ensure you end up with a structure that actually achieves your objectives.
Make sure it makes financial sense
If tax minimisation is the driver of the decision to create a trust, then an essential preliminary step is a cost/benefit analysis.
In addition to the creation costs, trusts have ongoing management costs including ASIC fees for any corporate trustee and annual tax returns. While these costs are usually relatively minor compared to the tax saving they can generate, there does need to be an analysis conducted by your financial or tax advisor to ensure the structure will at least cover its own costs. The cost of contributions to the trust (if any), level of income expected to be generated in the trust and availability of individuals or other entities for income splitting will be relevant.
Your advisor may also consider alternatives such as investing via a self-managed superannuation fund or direct investment.
Get the type of trust and structure correct
There are multiple types of trusts, the most common being discretionary and unit trusts, with each serving a different purpose.
Additionally, a structure may simply involve one trust, or there may be benefit in operating multiple trusts. For example, if you are running a business within a trust then it is often good practice to separate this from investment assets so that they do not go ‘down with the ship’ in the event of a business failure.
Asset protection considerations
Trusts can provide excellent asset protection from creditors or bankruptcy. However, improperly structuring or managing the trust can undo this benefit so they provide little, if any, asset protection.
Care needs to be taken in managing initial contributions to the trust (ie/ a loan or gift) and managing ongoing loan accounts or unpaid entitlements. These can otherwise unintentionally operate to shift equity back to an at risk individual where it is subject to their asset protection risks.
Thought should also be given to the key controllers of the trust (appointors, trustee directors and shareholders) to ensure the bankruptcy of an at risk individual will not adversely affect the trust.
Succession considerations
A Will is not generally effective to deal with the assets of a trust and specific planning must be undertaken to ensure this structure passes in the manner intended on the event of the death or incapacity of a key individual.
This is particularly important as the terms of a standard discretionary trust will invariably provide that the trustee of the trust can do whatever they want with trust assets and benefit whomever they want within a broad class of potential beneficiaries (usually including themselves). Careful planning is therefore required when there are multiple parties you intend to benefit in the future and achieving these objectives may require bespoke trust terms or bespoke trustee constitutions.
Stamp duty and land tax
An intention to acquire real estate via a trust is a significant red flag to seek advice prior to the trust creation or acquisition. Many states in Australia now have surcharge stamp duty and land tax rates applicable to foreign purchasers. These surcharges can also capture trusts that are not necessarily foreign operated, but have not been adequately drafted to fully exclude the potential for a foreign person to benefit.
Likewise, if there is an intention for a trust to transact on real estate in the future, then structuring the trust in a particular manner can increase the prospect that stamp duties concessions will be available. For example, if the trust may receive farming land in the future, then appropriate capital beneficiary restrictions can ensure the farm duty exemptions under Section 56 of the Duties Act 2000 (Victoria) are available.
Key Takeaway
Your financial and/or tax advisor must be involved in the initial decision to create a trust and to determine the appropriate structure. Once the decision to create a trust is made, legal assistance in preparing the trust and considering its impact on your overall estate planning objectives can ensure the trust deed is drafted fit for purpose.
Mistakes in the setup can be costly to rectify after the fact.
How We Can Help
For expert advice or guidance regarding Trusts or Estate Planning, contact us.
Moores also works with a number of quality financial and tax advisors and can assist to connect you to a suitable advisor.
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