You may have heard about the benefits of owning a family trust and wondered how it would work for you. Family trusts are generally used to transfer wealth to the next generation, but many people are wary of forming one due to legal and tax complications.
Below is a guide that helps to explain family trusts further—if they’re right for you, their benefits and some tax considerations you need to know.
Who is a Trustee?
A trustee is a person who manages a trust. They’re responsible for making decisions regarding the assets within the trust and are accountable to the beneficiaries named within the trust.
Trustees are often nominated by those who establish the family trust. They typically appoint the trustees at the time of drafting the trust deed. The most common types of trustees are the executor of an estate, and the person awarded an asset by the trust.
They are personally liable for any decisions they make as a trustee. For instance, if a trust becomes insolvent or bankrupt, the trustees will be held personally liable. This is why it is important to choose trustworthy and financially capable trustees.
What are the Benefits of a Family Trust?
Including a family trust in your estate planning can provide you with several benefits.
A trust is protected. You can use a trust to protect certain assets from the creditors or dependents of trust beneficiaries. This can be particularly valuable during a divorce settlement or in the event of an unexpected death.
A trust can also help you protect your assets from future lawsuits if your beneficiaries are involved in accidents or medical claims.
Income Distribution Flexibility
Trusts can be designed to provide particular beneficiaries with more income or capital than others. You can also use a trust to provide certain beneficiaries with trust income while giving others a share of the capital sum. If a trust grows in value, you can also use it to provide a higher income level to the beneficiaries who need it.
Although you’ll have to pay income tax on the trust capital, any income generated by the trust is not subject to tax.
You can also gift capital to the trust tax-free. This can help beneficiaries save on inheritance tax, particularly if they haven’t reached their personal allowance.
Does a Family Trust or Trustee Need to Pay Tax on its Income?
There are several situations in which a trustee can be liable for trust income tax, including:
When a part of the trust income is given to a non-Australian resident beneficiary, the trustee should pay tax on behalf of the non-resident beneficiary.
The trustee should pay tax on behalf of minor beneficiaries under 18 years old as of 30 June of the financial year.
Undistributed Trust Income
If the trust income is not distributed to beneficiaries fully, the trustee should pay tax on the income retained in the trust and the top marginal rate of 45%.
A family trust is a valid way to plan and protect your assets for the future. It can help you reduce the amount of taxes you and your beneficiaries will pay while providing the flexibility to distribute the income and capital to your beneficiaries accordingly. However, you must be mindful of the tax consequences as well.
Let a tax accountant in Gold Coast help you out. New Wave offers end-to-end accounting and bookkeeping services to scale and grow businesses. We can also help you with your family trust. Get in touch with us today!