There’s a lot to consider when structuring your business, and it’s important to take a long-term view.
If you’re looking at building a business that you can pass down from generation to generation, a family trust structure can provide a tax-effective and sustainable solution.
But there are a number of legal considerations involved. This article outlines what you need to consider when structuring your business as a family trust.
Liston Newton Advisory’s business structure specialists provide expert support and guidance to help you structure your business correctly. Contact us today to discuss whether a family trust is suitable for your new business.
Creating a trust
In order to structure your business as a family trust, you need to supply the following criteria:
- Trustees, or directors of a corporate trustee
- A trust deed that outlines the governing rules
- Initial assets, known as a settlement sum. This is a starting nominal amount that creates a legal effect that the trust can be used, typically in the realm of $10
- Identifiable beneficiaries/members of the trust.
The trust deed
This is the legal document that spells out the rules and obligations for setting up and running your trust, and forms the trust's governing rules.
It contains important information such as:
- A statement of the relationship between the trustee and the beneficiaries
- The duties and investment powers of the trustee and its beneficiaries
- The trust fund’s key objectives
- Who is allowed to be a member of the trust
- Whether benefits are able to be paid as an income stream or a lump sum.
The parties to the trust deed are the settlor and the trustee. To ensure the trust is set up correctly, the deed must be:
- Prepared by a competent party (it’s a legal document, after all)
- Signed and dated by all trustees
- Executed property according to relevant state or territory laws
- Reviewed regularly and updated as required.
The key players in your trust
Your fund’s trustee plays an important role in managing the trust. In simple terms, the trustee is the legal owner of the assets held within the fund, which is held in trust for the beneficiary/s.
The trustee can be anyone that has the capacity to own property, so it can be an individual, a group, or a company. Any decision they make must be noted in formal minutes, particularly when discussing important matters such as the beneficiaries’ entitlements.
When a company acts as the trustee, the company directors control the trust’s activities. This configuration provides the added benefits of assisting with limited liability, and perpetual succession, as unlike an individual the company itself never dies.
There are a number of different trustee classifications, which vary according to the roles they perform. These include:
- Public trustee. This role fulfils the public functions of administering estates, wills, and similar activities.
- Trustee companies. Trustee companies act within their statutory capacity as administrators and executors of an estate, and manage the funds and investments on behalf of the beneficiaries.
- Bare trustees. This is when an individual holds a trust property on behalf of another adult individual of full mental capacity. This trustee holds no vested interest in the fund itself; their only role is to convey as per instruction of the beneficiaries.
- Custodian trustees. A custodian trustee holds any trust assets to be managed by the managing trustees, in accordance with terms set by the settlor.
- Advisory trustee. Advisory trustees are appointed by a Public Trustee, and act in an advisory-only role. They have no power of management or administration over the trust’s assets.
The beneficiary of the trust is the person for whose benefit the trustee is holding the trust assets. The beneficiary can be an individual, a company, or even the trustee of another trust.
Beneficiaries are noted in a trust schedule in different classes.
The initial beneficiaries of the trust are typically immediate family members or close relatives. A related company or charity is also a class of beneficiary. A trustee can also be a beneficiary, however, they can’t be considered a sole beneficiary unless there is more than one trustee.
Beneficiaries receive entitlement to the trust’s income or capital, as set out in the trust deed, or by discretion of the trustee.
They are typically taxed on the net income of the trust. This is based on their apportioned share of the trust’s income, whether they actually receive the income or not.
The settlor is an independent individual who is appointed responsibility in setting up the trust, and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons the settlor themselves can’t be the trustee, or a beneficiary of the trust, nor can their spouse or their children.
Usually a lawyer or accountant, the settlor's role is to help the client establish their trust. They don’t have any right to income or capital from the trust assets.
It’s the settlor’s role to pay the initial settlement sum for the trust. In the case of property being transferred as the settlement sum, stamp duty and capital gains tax needs to be taken into account.
Once this has been paid, the trustee issues a receipt to record this event.
The settlor’s role is complete when the trust deed is executed, and the trustee assumes responsibility for the trust.
The appointor’s role is a simple one: they exist to appoint, replace, or remove the trustee. This typically occurs if the existing trustee dies or goes insolvent—or if they don’t follow the appointor’s direction.
The initial appointor is named in the trust deed. As per the deed’s instruction, the appointor is able to resign, and has the power to nominate another individual in their place. Should the appointer die without nominating their successor, then their legal representative can become the interim appointer until another is named.
Interestingly, both a beneficiary or the settlor can be named as an appointor. So too can a company.
It’s possible to have more than one appointor, in the event that the initial appointer becomes unable to carry out their duties for whatever reason. In these circumstances, these appointers are usually founding members of the trust. This is particularly beneficial for discretionary trusts, and this usually sees both parents be nominated as appointors.
Legal advantages of family trusts
There are many benefits to setting your business up under a family trust structure. These include:
- Ease of succession planning
- Cashflow benefits
- Flexibility with tax and business operations
- Access to Capital Gains Tax concessions
- Improved risk and asset protection
- Access to tax minimisation strategies.
Let’s look at two of these in more detail.
Improved asset protection
When you form a family trust, you’re no longer considered the legal owner of any assets held by the trust. This responsibility passes to the trustee.
Should you get into financial trouble, this then puts those assets out of reach of creditors. A trust can also add an extra layer of protection when holding shares, as the trust’s founders can hold their shares in the trust, rather than their own name.
This makes family trusts a popular structure when protecting your assets against business failure, bankruptcy, potential marriage breakdowns, or challenges to a family will.
The key aspect to your asset protection is appointing the right trustee.
In this case, appointing a corporate trustee means that they have nominal capital available, which is a big benefit should any borrowing go wrong. This makes a corporate trustee a less risky option for making investments within the trust, when compared to an individual.
Tax minimisation strategies
Family trusts are beneficial for effective tax planning, as distributing trust income among beneficiaries allows you to spread it across those on a lower marginal tax rate. This effectively enables you to reduce the trust’s tax rate.
However, how the trust’s net income and capital gains are distributed is entirely up to the trustee. They’re able to distribute whatever they want to whomever they want. So again, it’s critical to appoint someone you trust.
You have three adult children, and you distribute your taxable income to them through the trust. This way, instead of yourself being taxed at the personal marginal tax rate of 45%, the income is now taxed at each of your children’s lower marginal tax rates.
But be careful when doing so. For children under 18 years old, any income or capital gain trust distributions are taxed at 45%-66%, depending on the income figure.
Legal disadvantages of a family trust
There are also a number of disadvantages to a family trust that you need to be aware of. These include:
- Any income the trust earns that remains undistributed is taxed at the top marginal tax rate
- As mentioned, distributions to minors are taxed up to 66%
- Tax losses can’t be allocated to beneficiaries
- There are a number of costs involved in establishing and maintaining the trust
- Family disputes can make running the trust a complex and difficult affair
The final word
If you’re expecting your business to grow beyond you, a family trust can be a robust and effective vehicle to provide long-term stability for your family.
It enables you to minimise tax, protect your important family assets, and create a legacy to pass on to the next generation. So it’s important that you structure your business correctly.