Family trusts and self managed superannuation funds (SMSF) are both popular options for investors who want to control and direct their family wealth.
All too often however, they are considered an either/or investment choice.
If used together they can often prove very beneficial in maximising wealth creation and wealth preservation.
Most people are well aware of the tax advantages of super for accumulating investment wealth. SMSFs have the added advantage of maximising the benefits you obtain from super due to the flexibility and control they arm you with. But there are downsides to super.
Your money is essentially locked away until retirement, you are limited regarding how much you can contribute, and your superannuation account must be paid out upon death.
Conversely, family trusts are not subject to preservation, so your family money is not locked away.
They are relatively simple to establish and operate and there are no limits on how much you can put in.
While beneficiaries of distributions from a trust are required to pay tax on that income, distributions don’t have to be made equally to all family member beneficiaries. This can be extremely tax effective when distributions are passed on to family members on lower marginal tax rates.
Family trusts have the advantage of being able to hold personal use assets such as a holiday home, as well as businesses. Finally, family trusts can continue past your death making them an excellent vehicle for intergenerational wealth transfer.
The downside of family trusts is that they may not be as tax effective as super.
What many wealthy families understand is that if you have both a family trust and a SMSF, you can mould your financial affairs to benefit from the combination of investment structures.
Both structures assist in protecting a family’s wealth as personal creditors may be hindered. With improved financial reporting and investment options, and cheaper systemised compliance, family trusts and SMSFs are no longer the domain only of the wealthy.
Family trusts are particularly useful early in the family’s wealth-building process. At this stage, people are hesitant to put extra into superannuation because of the preservation requirements, and family trusts provide a tax advantaged structure for wealth creation.
As retirement approaches, wealth can be systematically moved from the family trust to the SMSF as extra discretionary contributions thereby building up the concessionally taxed retirement nest egg.
But this is not the end of the usefulness of the family trust structure. Post retirement, any extra wealth that can’t be recontributed to superannuation can be placed in the family trust.
As money is drawn down from super as a pension the family trust investment portfolio may be increased. Upon death, the family trust can be useful as it can continue on. Investments can be kept in place and control passed to the next generation.
This differs to superannuation which is designed to be run down throughout retirement then sold up and paid out upon death.
For many families, a family trust used in conjunction with an SMSF can be a very beneficial approach, providing intergenerational transfer of wealth benefits, assisting in wealth creation and management, as well as creating the most tax advantaged outcomes.
Michael Hutton is head of wealth management at accountants and business and financial advisers HLB Mann Judd Sydney.