Financial tools for Australians to trust
TRUSTS are useful tools in financial planning for Australians, especially those who own assets back home.
The three most common types are unit trusts, discretionary trusts (family trusts) and trusts which are settled by a will (a testator's trust).
With a unit trust the beneficiaries hold a number of units, and as such, have a defined interest in the trust.
One advantage of investing in a unit trust is being able to utilise the expertise of a professional fund manager.
There is no defined interest in discretionary trusts. They have potential interests only. The trustee of a discretionary trust decides on the beneficiaries and how the estate is to be distributed.
There are many advantages to discretionary trusts, including: The ability to structure your affairs flexibly and tax effectively. For example, Australian residents are liable for income tax on all income including investment income, at high rates. With a trust owning the investments, the trustee can distribute income to any one or more of the beneficiaries.
From a tax-planning perspective, the trustee is likely to make the distributions to those who are in lower tax brackets, thus saving on income tax.
The assets are protected from creditors, future creditors and liability actions. As the assets are legally owned by the trustee (not by you), the assets in the trust are protected if you are sued and lose.
Trusts settled by wills can be discretionary trusts or trusts where a beneficiary has a known beneficial interest.
There are numerous benefits in structuring your will so as to leave money or assets in trust for one or more of the people you wish to benefit from your estate: It enables you to leave a life interest to a beneficiary in an asset. For example, if your sister lives in a house which you own and you wish to allow her to remain there if she so wishes for the rest of her life, and upon her dying or moving out for the house to go to your children, you can do this by giving her a life interest in the house (a trust).
It may enable you to minimise your family's future income tax liabilities. For example, you have a sum of money which you wish to leave for the benefit of your children or your wife and your children. By leaving it in trust, you will save them paying income tax, thus effectively leaving more for your family. The trustee can distribute some of the income generated from the trust fund to the child (or to the legal guardian for the benefit of the child) up to the full adult tax-free threshold of A$5,400 without any of the income being liable for income tax.
Under normal circumstances, children have a tax-free threshold of only A$416, after which the income is taxed at 66 per cent.
If you feel one or more of your children cannot handle money responsibly, it may be advantageous to leave it in trust for them so they receive an income to live on, yet the capital is preserved.
As the Australian Tax Office now imposes punitive taxes on persons who transfer assets or services into non-resident trusts and to the beneficiaries of the trusts, it is no longer advantageous in most instances for persons upon becoming residents of Australia to have an interest in or a potential interest in a non-resident trust.
In many cases, it would be worth while transferring the assets into the beneficiary's name or to an Australian resident trust.
Steve Cumming is a financial planner for Australian expatriates.