馃攳
5 reasons why Australians love trusts - YouTube
Channel: Tax Nuggets Academy
[0]
We Australians have an obsession with trusts.
[4]
There are way more trusts than companies in Australia.
[6]
In fact, according to the Tax Office
[9]
there are around 970,000 companies
[12]
in 2017 income year compare d to almost 1.4 million trusts
[17]
and super funds. There are real estate investment trusts, managed
[21]
managed funds, managed investment trusts,
[23]
testamentary trusts, public unit trusts
[25]
and even self-managed super funds are also trusts.
[30]
Rich folks particularly love discretionary trusts also
[33]
known as family trusts and this is what we'll be focusing
[36]
on today. The five reasons why Aussies love trusts specifically
[41]
family trusts, but before we get into that a bit of background
[45]
on trusts. So what exactly is it? A trust is basically this
[50]
relationship between the person looking after the trust and
[54]
the person benefiting from the trust. That is a relationship
[57]
between the trustee and the beneficiary. For trust to exist there must
[62]
be trust property or assets like there has to be something
[66]
for the trustee to look after that could be cash or real
[70]
estate or shares. The rules on how the trustee should look
[73]
after the trust are usually contained within a trust deed.
[77]
An example of a clause in a trust deed might look like this
[82]
the trustee should only ever distribute the income to certain
[84]
beneficiaries like my family members.
[88]
Discretionary trusts are particularly unique because it's
[91]
up to the trustee to decide who should get the distributions
[94]
of income generated from the trust assets each year that
[98]
is it subject to the trustee's discretion.
[101]
Hence, the term discretionary trusts. Trustees are appointed
[105]
by an appointor who is usually the ultimate controller of
[109]
the trust. Like if you were going to set up a trust for yourself
[112]
and your family members as beneficiaries, you would make
[115]
yourself the appoint or and appoint someone you trust as
[119]
the trustee but if things go wrong, you can always fire that
[122]
trustee and appoint a new trustee. According to the Tax Office,
[127]
the discretionary trust is the most common type of trust
[130]
found in Australia by a long mile. And here are the reasons
[134]
why. Reason number one. Privacy. The legal owner of a trust
[139]
is the trustee who is merely looking after the trust for
[142]
the benefit of the beneficiaries.
[144]
Nobody actually knows who actually owns the trust
[148]
beneficially or who really controls the trust, which is great
[151]
when you don't want people sticking their noses in your business.
[154]
It's also very common for the trustee to be a company and
[158]
for some beneficiaries to be the directors of the trustee
[160]
company rather than the beneficiaries being trustees themselves.
[165]
This makes it a lot harder to trace through who's actually
[168]
in control of the trust. Number two. Asset protection.
[173]
Rich folks put their assets in a trust rather than holding them
[176]
in their own name.
[178]
Like they would put money in the bank account, but it's under
[181]
the trust's name.
[182]
The legal owner would show up as the trustee rather than
[186]
the persons own name. Say a rich folk's daughter meet a pretty
[191]
boy / gold digger who is really after her family money.
[195]
The money is locked up in a trust. When she 'inherits' the trust
[199]
like becoming one of the directors of the corporate trustee,
[202]
nothing's in her own name.
[203]
She merely gets distributions from the trust as a beneficiary.
[207]
And pretty boy
[208]
will not be able to access the money in the trust
[210]
if they have a relationship breakdown.
[212]
This is no laughing matter.
[214]
I have seen so many trusts which only allow beneficiaries
[218]
that are blood related.
[220]
Have you seen the TV series Dirty John where Eric Bana plays
[224]
the gold digger.
[225]
It's based on a true story.
[227]
Check it out.
[228]
Anyway, I digress... Apart from gold diggers,
[232]
Trusts can also protect family assets from other potential
[235]
threats such as bankruptcy and malpractice.
[238]
It's like this firewall that insulates the assets from potential
[241]
lawsuits and creditors. Number three. Less compliance.
[247]
Companies have to report to ASIC and there's also a requirement to
[250]
to lodge annual reports each year, not to mention independently
[254]
audited financial statements
[255]
if the company reaches a certain size. There are no such
[259]
requirements for trusts to report to ASIC or to be independently
[263]
audited regardless of their size.
[266]
Number four. Flexibility or what
[269]
I like to call ruling from the grave.
[272]
The discretionary trust is probably the most flexible structure
[276]
available in Australia.
[277]
It provides this ability to choose who the distributions
[281]
can go to and what amounts they should get and this can vary
[285]
from year to year. Capital or revenue can be distributed to
[289]
different persons and this can also change from year to year.
[292]
Because of this flexibility which folks use trusts for
[296]
succession planning. Say you are very rich, dude, and you're
[300]
getting old and you've got five grandkids and they're all
[304]
under 30s, unmarried,
[305]
and have no kids. And you're really starting to get worried
[308]
about the end of your lineage.
[311]
So you set up a trust and put all your assets in there.
[314]
And in the trust deed which are the rules of the trust
[317]
you say that grandkids can only become beneficiaries of the
[321]
trust when they get married and have their own kids.
[325]
Yes.
[326]
Discretionary trusts would actually allow you to do that.
[329]
That's a pretty extreme example, but think of other things
[332]
that can be achieved such as using trusts to ensure disabled
[336]
family members are looked after when you're not around.
[340]
Number 5, I've saved the best for last which is tax planning AKA
[346]
Legally avoiding tax.
[349]
A trust can distribute to the most tax advantage beneficiary
[352]
every year. Say Mom and Dad sets up a trust which holds
[357]
their share portfolio and it earns dividends each year.
[361]
Mom has a full-time job and Dad decided to stay home to look
[364]
after the kids because of COVID and so he has no income.
[368]
The trust can distribute its income to Dad rather than to Mom
[371]
because he would be on a lower marginal tax rate than Mom.
[374]
And so he pays less tax. So together, they'd be paying less.
[378]
tax than if any of the distributions went to Mom.
[382]
This is a very common trust strategy known as income splitting.
[386]
The Labour government really does not like it at all.
[389]
They promised to crack down on trusts if they won the last
[392]
election by introducing a minimum 30 percent tax rate for
[396]
all distributions from discretionary trusts.
[399]
Trusts can also access the 50% CGT discount unlike companies
[404]
which means that CGT on assets sold, which have been held
[408]
for more than a year is effectively halved. A discretionary
[411]
trust can stream capital gains and franking credits.
[414]
For example, Mom and Dad's trust sold shares during the year
[419]
and it made a very nice capital gain. The trustee can choose
[423]
to distribute all its revenue
[425]
i.e. the dividends to Dad and all of the capital gains to Mom.
[431]
it so happens that Mom has made some capital losses in
[433]
prior years during GFC.
[435]
So the capital gains can be completely absorbed by capital
[438]
losses and she pays no CGT.
[442]
So there you have it. 5 reasons why we love trusts.
[446]
It gives us privacy.
[447]
It protects us from gold diggers and potential lawsuits.
[451]
There's less red tape.
[453]
It's so flexible
[454]
it allows us to rule from the grave and to top it all off...
[457]
It saves us tax dollars.
[459]
I'm thinking of making a series of explainer videos
[462]
on trusts and maybe covering things like trust loss testing
[467]
and Family Trust Elections, whether there can ever be a fixed
[471]
trust after the Colonial First State case.
[474]
The list is endless.
[475]
Let me know which area you find particularly confusing and
[479]
you'd like to understand better.
[480]
Drop me a comment below.
[482]
Anyway...
[482]
I hope you found this little Tax Nugget interesting.
[485]
Thanks so much for watching. Until next week...
[487]
Bye!
Most Recent Videos:
You can go back to the homepage right here: Homepage