The truth about Trusts
Should you have a trust? Naturally, the answer is dependent on your circumstances. The primary reason for having a trust is to provide for beneficiaries now and in the future, even after your death. Using a trust is often recommended as a way of minimising risks and managing wealth. There is also the potential […]
|Should you have a trust? Naturally, the answer is dependent on your circumstances. The primary reason for having a trust is to provide for beneficiaries now and in the future, even after your death. Using a trust is often recommended as a way of minimising risks and managing wealth. There is also the potential for tax savings.
Here are some of the key reasons for having a trust:
• To protect assets from claims by creditors to your business.
• To protect property accumulated before entering into a relationship, to keep this separate in the event of a ‘parting of the ways’ and a division of assets.
• To protect assets from your children’s future partners/spouses!
• To remove assets from claims against your will including testamentary promises and family protection claims against your estate.
• To simplify the administration of your estate.
• To protect your assets from undue influence or mental incapacity in old age.
• To combine assets when merging families (may be used in conjunction with other structures).
• To exclude assets from means testing (income testing).
• To give money to beneficiaries more easily.
• To look after educational, medical or other needs of family members or others.
• To achieve an optimal tax structure.
• To safeguard assets in the event of bankruptcy.
• To achieve a special purpose (e.g. provide for an ex-spouse following separation).
• To manage your tax affairs (see below).
What can trusts do?
Subject to the trust deed, a trust can: own assets and investments; carry on a business; enter into contracts; borrow; earn income; incur expenses; and pay tax or carry forward a loss.
Trusts can also distribute income (subject to time limits) or capital to one or more beneficiaries.
Effective use of trusts
Trust management involves diligent and timely administration of the trust as it is very important to support trustees’ decisions. This is achieved by having meetings with all trustees and by documenting decisions through thorough paperwork and resolutions. Financial statements should also be prepared for a trust to capture income and expenses, advances to beneficiaries, and trust assets and liabilities.
There can be significant taxation benefits if your trust earns income from its assets. This is because income earned by a trust is currently taxed at 33 cents in the dollar whereas the highest rate of tax for individuals is currently 38 cents (pre the May 20 Budget). While personal services income cannot be assigned to a trust, investment income such as interest, dividend and business profits can be retained by the trust as ‘trustee income’ or distributed to beneficiaries as income. In the case where a beneficiary has a marginal tax rate less than 33 cents there can be additional savings. Children 16 years or younger are currently taxed at 33 cents. Applying income to beneficiaries is a legitimate use of a trust.
As with companies and other structures, the effectiveness of a trust is usually closely linked with timely planning and obtaining the right advice.