Investors and entrepreneurs alike have been using and abusing the Discretionary Family Trust model for decades. It seems that for the purposes of income shifting, tax minimisation and asset protection from creditors, family trusts have topped the charts in a way that even Michael Jackson couldn’t!
If you’re asking yourself, what exactly is this complicated beast known as the Family Trust? You’re in the right place, and if you’re considering purchasing property or restructuring your business operations, perhaps the next ‘right place’ for you to be in would be your solicitor’s office.
However, for the time being, you should begin your journey to enlightenment by reading to the end of this blog. Hopefully, by then you will have armed yourself with a set of concepts (and questions!), for if this blog does not cause you to ask questions, then you have not been paying attention.
If there is one thing that you take away from this blog, it should be this – a family trust is usually a discretionary trust. The income or capital of the trust is held for the benefit of a list of ‘potential’ beneficiaries (typically family members), whose entitlement to be paid income from the trust only comes into existence if the trustee nominates the beneficiary. In other words, the trustee has the discretion as to which beneficiaries, if any, will be entitled to the income of the trust. The trustee is also entitled to decide how much of the trust income will be paid to each beneficiary.
So, at most, each beneficiary has the right to be genuinely considered for distribution.
Therein lies the simultaneously beauty and ugliness of such an arrangement. One step closer to more effective asset protection often translates to one step further from control over the asset, and indeed the operation of the arrangement itself.
Family trusts are a useful way for distributing income amongst low-income family members, who are not being taxed at the highest individual marginal rate. As the individual tax rates of the members of your family change each year, you may adjust the distribution of income from the trust. Therefore, if you hold an income-earning asset, some astute legal advice regarding the potential advantages of a family trust would not go astray.
Family trusts also play a role in protecting the family asset’s should a business venture fail. They segregate personal assets from business assets, and provide a buffer to promote the smooth transfer of wealth between generations.
Unlike the conservative approach enshrined in trust law and tax law, the Australian family law jurisdiction is an unpredictable cousin that often shows up uninvited and isn’t afraid peak beyond the trust structure to assert a different reality! Family Court judges have been armed with comprehensive powers to reverse transactions, deem certain arrangements inoperative and bind third parties. Motivated by notions of equity and justice, and the judges will do what is necessary to enable each party to move on with their lives post-separation. There is a very real chance that assets that are held by a family trust will be regarded property of the relationship, and thus available for division in a property settlement.
So where to from here?
By now you should have a basic understanding as to why family trusts have traditionally been thought of as multi-purpose vehicles used to navigate rough terrain. However, you should also have picked up that the rough terrain is made up of a series of intentionally placed bumps, hurdles and pot holes set by various government departments and legislative frameworks driven by overarching concepts of justice.
If you remember two things from this article, the second thing should be this – for every asset protection crusader, you can bet your bottom dollar that there will also be an equally motivated government agency, litigant or creditor devising methods to pierce the veil that you have so meticulously embroidered to cloak your assets.
Therefore, it is absolutely crucial that you obtain legal advice specific to your situation.
For more information contact Longton Legal on 1300 599 999.
Written by Suzana Dimitrijevic