There are a lot of reasons people might want to setup a trust to hold investments or run a business. However due to recent legislation, a lot of the benefits of having a trust have been diminished.
If you are thinking of setting up a trust, you should consider whether it is still worth having a trust. Below I have considered the good, the bad and the complexities of whether it is still worth having a trust.
Tax saving – distributing to a spouse/child over 18 years
Before and now – Your spouse or child over 18 years can receive a distribution from the trust (assuming they are named as a beneficiary in the trust deed) and pay tax at their marginal rate.
This has always been a key benefit with a trust.
Tax saving – creating a testamentary trust for children or disabled beneficiaries
Before and now – A testamentary trust is mentioned in your will and set up with money from your estate if you pass away.
Having a trust setup to take care of your children/grandchildren (or family members with a disability) continues to provide some tax benefits.
Tax saving – difficult to allocate distributions exactly
Before – You could allocate exact amounts to beneficiaries (eg. I give $500 to each child with the balance to my wife).
Now – You have to allocate percentages (eg. I give 10% to my son over 18 years of age, 0.5% to my son under 18 years of age and 89.5% to my wife).
Tax saving – low amount allowed to children under 18 years
Before – In 2011, each child could receive $3,333 trust distribution (assuming no other income) before paying tax.
Now – Since the 2012 year, each child can only be paid $416 per year from the trust with a penalty rate being paid on the excess. This means you have to be very careful with distributions.
Tax saving – using a “bucket” company isn’t as effective
Before – You could distribute to a company for tax purposes, but keep the actual cash in the trust. As a company is taxed at 30% for each dollar, this would save tax compared to a high-earning individual who would be taxed at their marginal rate (which might be 37% or 45% plus Medicare levy of 1.5%).
Now – The trust must eventually pay the actual cash to the company, otherwise an interest paying loan must be setup to repay the cash.
The rules regarding this are complex, see ATO taxation ruling (TR) 2010/3 for some heavy reading.
Must resolve distribution percentages before 30 June
Before – The ATO allowed a concession to make distributions before 31 August.
Now – Distributions must be made on or before 30 June.
Trust income must be distributed
Before and now – Trust income must be distributed or tax paid at the highest rate by the trustee. This is different to a company where 30% tax is paid and then the money can be kept in the company.
Given the added complexities of trusts, expect to pay more for accounting as accountants have additional tax and legal requirements to consider.
Each trust has separate rules or principles which are set out in the trust deed. Trusts created 20 years ago often have wording and principles that are out of date. Setting up a trust now could also mean out of date wording in 20 years.
A question on the horizon (which has always existed) is whether the government will change the law regarding trusts. A simple change to trust benefits (such as disallowing the 50% capital gains discount for trusts) might cause trusts to lose their attractiveness.
Is it still worth it?
Having a trust can have lots of benefits, but it is worth discussing with your accountant the best structure for you.