LEGALLY SPEAKING with Gary Simpson

There are many advantages in utilising a family trust as part of your investment and succession planning strategy.  Advantages include:

• Business Asset Protection - the ability to hold assets in trusts, thereby protecting them from creditors and other litigants in the event that a business runs into financial difficulties.

• Protection from Relationship Property Disputes - holding assets in a trust can protect them from future relationship property disputes - many people as a consequence of a relationship break-up decide to transfer their remaining assets into a family trust to protect against future relationship difficulties (once bitten twice shy), however there is an interesting trend where an increasing number of people who are "younger" and are not in a permanent long-term relationship are forming trusts to protect the assets that they have accumulated and wish to protect before they enter into a long-term relationship.

• Protection for Children and Grandchildren - trusts can not only be utilised to protect the assets of the person or persons setting up the trust, but they can be utilised to ensure that assets that would otherwise eventually be inherited by children or grandchildren are protected long-term, whether from future partners or from failed business ventures.

• Family Protection and Testamentary Promise Claims - wills are not sacrosanct and do have the potential to be challenged.  The transfer of assets to a family trust (combined with the gifting off of settlor loans) reduces the ability for a potential claimant successfully challenging a will to receive assets following death.

• Education Trusts - trusts can be established for particular purposes, of which the education of children and grandchildren is a
  prime example.

• Children with Special Needs - a trust can help to ensure assets are not only safeguarded for a child with special needs such as disability, but can also offer some protection against means testing for government benefits such as a sickness/invalid benefit.

• Professional Help - the effective use of a family trust, together with the engagement of an independent trustee, can reduce the possibility of the trust entering into poor investments such as Blue Chip property purchases, as the independent trustee would be involved in the investment and purchase decisions of the trust.

• Taxation - establishing a trust primarily to avoid taxation is not likely to be effective, and in my experience most trusts are established for reasons other than the reduction in taxation.  However, the utilisation of a trust does result in many instances in taxation being reduced, especially if the trust has beneficiaries that are paying income tax based upon the lower tax rates - from 1 October 2010 the income tax rate is 10.5% for income up to $14,000.00, 17.5% for income from $14,001.00 to $48,000.00 and 30% from $48,001.00 to $70,000.00.

• Future Benefits - it is likely that family trusts will have benefits that are not yet apparent, or even on the horizon - 20 years ago family trusts would be utilised primarily to avoid or reduce death duty, however once death duty was abolished (or more appropriately reduced to a rate of "nil") some 16 years ago the creation and use of trusts has increased at an exponential rate as other benefits such as the protection of assets from relationship property break-ups and the ability to obtain protection from income and asset testing has become apparent.

Budget Exceptions

There are two areas in which the Budget has/will affect family trusts to (I believe) a minimal level.

• As a consequence of the Government reducing the top personal income tax rate from 38% to 33% per annum (i.e. to be in line with the trust taxation rate of 33%) high income earners may not be as inclined to utilise a trust to earn income which would otherwise be their income, as the income tax rates will be the same.  However, there are still advantages in utilising a trust in this instance, as it enables the income earned by a trust to be transferred to other beneficiaries of the trust who are subject to lower rates of income tax, and secondly there are all the above reasons why it is beneficial for income to be earned and retained by a trust, rather than by individuals.

• The Government has stated in releasing the Budget that it will be looking at the closing of the tax loop hole by which family trusts are utilised to reduce a person's income to enable them to apply for Working for Families benefits.

Summary

In summary, the effect on family trusts imposed by the recent Budget are minimal, and there are still sound reasons for continuing to utilise, or form, family trusts.