Long before self-managed superannuation funds were invented and became today’s investment accessory of choice, there were family trusts.
There are 534,000 SMSFs in Australia and about 350,000 family trusts.
The extraordinary growth in SMSFs does not mean that family trusts are no longer relevant. In fact, family trusts provide tremendous flexibility for managing investment portfolios and family wealth. Family trusts are discretionary trusts that have elected with the Tax Office to limit the potential beneficiaries of the trust’s annual distributions to “family members”. Family members listed can include relatives within two generations. Trusts generally distribute their income annually to beneficiaries who are then required to pay tax on that income. In the case of discretionary trusts the trustee can use his or her discretion to determine which family members to distribute the income to. Generally, income is distributed to those family members who have the lowest taxable income and who will incur the least amount of tax.
Family trusts have an advantage over SMSFs as they have far fewer restrictions and rules. Unlike an SMSF, money can be added to or lent to a trust with no restriction, money can be borrowed from the trust and distributions can be paid out or reinvested. There is no age restriction on adding to or drawing funds from the trust and family businesses can be run through them.
The assets of a family trust are administered and controlled by the trustee of the trust rather than by the individual beneficiaries. This can provide excellent asset protection advantages in certain circumstances, for example, if a family member is sued.
Family trusts are also useful for estate planning purposes. Through a family trust, the ownership of assets such as a share portfolio or holiday house can continue uninterrupted even when a key family member dies. This is because the family member doesn’t own the asset, the trust does.
Consequently, the assets don’t form part of the individual’s estate for the executor to have to distribute. This can make the administration of the estate simpler, and the outcome regarding family assets more certain. Trusts can be multi-generational, and a life cycle of up to 80 years is allowed for trusts formed in NSW.
For those wanting to invest a substantial amount, say more than $300,000, and have either maxed out their contributions to super, or want more accessibility than super provides, a family trust can be worthwhile.
This is particularly so if there are low-income beneficiaries in the family group to whom taxable distributions can be allocated. The reason for suggesting an investment amount of greater than $300,000 is because there are costs to running a trust, such as the preparation of a tax return each year.
The fees incurred need to be outstripped by the tax saved, or the value of other benefits such as asset protection that are obtained.
Michael Hutton is a personal wealth management partner at HLB Mann Judd.