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Confused about Family Trusts and Businesses

Discussion in 'Accounting, Tax & Legal' started by Red Head, 22nd Sep, 2010.

  1. Red Head

    Red Head New Member

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    Hi everyone,

    I am confused about family trusts and businesses/ companies and hope someone can help me.

    I have a spouse and 2 adult children.

    We already have a trading company in which I am the sole director and my spouse and children (including me) are shareholders.

    My children, drawing on company equipment and premises, will soon be commencing their own business.

    We would like to form a family trust to build and protect assets. Here are my questions:

    1. I believe it is best to establish the trust with a non- trading company as trustee and that it would be unwise to have our existing trading company as trustee. Is that correct?

    2. As there will be a trust, is it best for my children to start their business as a company or a partnership?

    3. Do my children hold their business/company name within the trust or does the trust hold the name on their behalf?

    4. Should their company (if that is the best structure to use) be trustee of the trust or does it mean we will have to create two additional companies - one for the trustee and one for the children's business?

    5. How does it work if we, as parents, have established the trust but their business is producing most of the income that comes into the trust.

    6. How does a company become a beneficiary of a trust and is there any benefit in doing this in regard to our circumstances. (for example, the existing company will be providing many of the resources for my children to commence their own business. Should this company become a beneficiary of the trust or should it charge the trust/children a fee for services provided and resources used?)

    7. If my children decide to sell their company/business in the future, how does this work with a trust?

    Please help me clarify my thinking on these issues. As you can see, I am a real rookie so any advice or suggestions would be greatly appreciated.

    Many thanks.
     
  2. tax guy

    tax guy Member

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    Hi to answer your questions:

    1. Yes have a new non-trading company as trustee of your family trust, otherwise your trading company is responsible for liabilities in the trust

    2. It depends what business risk is involved. Partnership have unlimited liability so if they are likely to be sued then this is not ideal. Company is probably the best. Its always expensive to restructure later on + CGT may apply as well. Best be avoided if possible.

    3. The entity they are trading out of should hold the business name.

    4. 2 separate companies for reasons explained above. If you need a non-trading company the cheapest I can find is $462 and pays for the ASIC registration for a year. You receive everything except a company constitution, but if its not trading you don't need one.

    5. The trust should hold the passive investments. i.e. shares in the trading companies any IP. The trust will only have income if the companies pay dividends to the trust. The trust is a passive investment vehicle.

    6. Yes if only all individual marginal tax rates are above 30%. You can distribute to one of the existing companies. Rules around distributing to companies though are making it more complex to shelter tax at 30%. There is still a possible timing deferral of a year or 2 though.

    7. The family trust will sell the shares to the purchaser and the family trust will receive a capital gain. The capital gain is then distributed to beneficiaries of the trust. Having a look at the initial structure is important as you will still want to access the small business CGT concessions, you want to make sure you get this right and not be in a position when you sell the business that you realise you can't access these.
     
  3. ladyjoe

    ladyjoe New Member

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    Can someone help and shed light please. I'm seeking advise on how best to protect our assests so no one can get to them and how to make our money work for us thru THE FAMILY TRUST, ( not confident how it all works properly?) and whatever else we may need to do to do limit risks agaisnt us personally, we both come from hard working poor families that work to live week to week, i want something better for us we have 6 children under 16 we are in our early 30's and i want to learn to be smarter to create financial security so we can teach our children.

    My husband has a 8 month business he is the sole director XXX pty Ltd. We opened a family trust, we are not trading out of the family trust yet as we thought we'd wait til the financial year starts, and we also want to put our home in the family trust to protect it from the business, first time we have started a business, learn't hugely from heaps of mistakes, my husband is in construction and it is really a cut throat business, much wiser 8 months later and lost some big money!! money where we could of paid our entire mortgage but to end up with a 0 balance instead! ( pullin my hair out) it was my husbands fault! just too kind So naieve and just didn't know! ANYWAYZ i really want to make our money work for us and understand best how to run the Family trust, most important i want to make sure our home is protected in the trust so no one can take it from us. So can u give your opinion on what u think the best thing to do in our case please? And how can i tell if my home is actually in the trust? And anything else u think may benefit my family financially ( if u got any tips or whatever) first time ive ever been on these sites ...
     
  4. tax guy

    tax guy Member

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    Can you advise if your house is currently used as security for your husband's Pty Ltd company.

    Also who is the current legal owner of your? is it 50/50 or 100% you or your spouse.
     
  5. ladyjoe

    ladyjoe New Member

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    Thanks for repying, no we haven't used the house as security at all, we haven't involved our home whatsoever in the business and yes our home is under both our names
     
  6. DrJohns

    DrJohns Member

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    You do not want your home in a family trust as it would no longer qualify for the Capital Gains Tax exemption for the family home.
     
  7. ladyjoe

    ladyjoe New Member

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    Capital gains tax

    So Mr Tax Guy do u agree with Dr John about the capital gains tax thingee on the home? Also what is Capital gains tax? isn't that only if u run your business from home and do tax right offs from it? and therefore if u sell your home u pay a percentage to the govenment, therefore capital gains tax?? Ive heard about this but not confident in knowledge
     
  8. tax guy

    tax guy Member

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    Yes capital gains tax will apply if you move this to a trust.

    You do not pay capital gains on your primary residence. Capital gains tax is where you make a gain on capital assets eg. share, property.

    So if you buy a property for 300k and sell for 400k then you will be liable for tax on the 100k if this is not your primary residence. By moving this to a trust you give up the primary residency status and it becomes subject to capital gains tax.

    Coming back to your asset protection question, this is more a question of any loans that you may personally have with other people. If you default on these loans then your assets may be used to pay these off. This includes your home.

    If the company your husband is operating from loans you or your husband money and the company is put into liquidation, then they can call the loans owing and ask you to repay this. Your assets would come into this calculation as well. So if you do not have enough assets they could sell your home.
     
  9. ladyjoe

    ladyjoe New Member

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    so your saying even though we live in our primary home as soon as we put it into the trust it than becomes subject to capital gains tax? And is that only if we decide to sell? We don't owe money to anyone but i know theres sharks out there, so what is the best way that i'm to protect our home from my husbands business if it goes belly up? Doesn't a business running at PTY LTD protect from personal liability? And is it best we also run the business via the trust??
     
  10. Terryw

    Terryw Well-Known Member

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    Hi LJ

    Transferring a home into a trust will not give you much asset protection, especially if you are doing it for 'asset protection' as it could be clawed back indefinetly.

    You have plenty of opportunity to save tax with 6 kids. Did you know each kid can receive up to $3333 pa without having to pay tax. $16,000 pa if they are actually working.

    I would look at having the shares of your company owned by the trust so the profit flows into the trust and then out to the kids to save tax. Watch out for stamp duty and CGT on the transfer of the shares though.
     
  11. Terryw

    Terryw Well-Known Member

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    Here are my responses to Red Head's questions:





    1. I believe it is best to establish the trust with a non- trading company as trustee and that it would be unwise to have our existing trading company as trustee. Is that correct?
      Yes, it is a good idea to keep things totally separate for a few reasons:
      a) It clearly distinguishes trust assets from non trust assets
      b) it is possible the trust is sued later and the trading company could lose its assets and reputation.
      c) if you ever need finance it will be a nightmare if your financier takes a charge over the company and you need to apply for finance for the business etc. eg. One of my clients did this against my advice and then he needed finance for invoice factoring for his business. He had to jump through all sorts of hoops just to get approval and it cost him a fair bit in accounting fees as he had the accountant organise it.

      2. As there will be a trust, is it best for my children to start their business as a company or a partnership?
      I think a partnership should never be used, unless between 2 companies maybe, as it is expremely dangerous. Each partner is liable for the whole debt of the partnership.
      A company would be much better because of the fact that it is a separate legal entity and has limited liability. But this should be separate from your business and your trust.

      3. Do my children hold their business/company name within the trust or does the trust hold the name on their behalf?
      The trust is separate. “Your” trust could hold the shares in their company or it could own the name of the children's business.

      4. Should their company (if that is the best structure to use) be trustee of the trust or does it mean we will have to create two additional companies - one for the trustee and one for the children's business?
      There company could operate as trustee for their trust – make it a separate trust to your own to segregate things (don't keep all eggs in one basket). Best to have 2 companies I think. One for your trustee and one for their business.

      5. How does it work if we, as parents, have established the trust but their business is producing most of the income that comes into the trust.
      Their company will make profit, hopefully, and this will be paid to the owner of the shares = the trust. Your trust will make its own.

      6. How does a company become a beneficiary of a trust and is there any benefit in doing this in regard to our circumstances. (for example, the existing company will be providing many of the resources for my children to commence their own business. Should this company become a beneficiary of the trust or should it charge the trust/children a fee for services provided and resources used?)
      Your company can lend or rent/lease its services or equipment to their trust or company. Your company is already probably a beneficiary of your trust as most deeds are worded so that any company in which a major beneficiary is a director, shareholder or other office holder in, will automatically be a beneficiary.

      7. If my children decide to sell their company/business in the future, how does this work with a trust?

    If they have set up under their own trust they can sell the shares in the company that runs the business or, more likely, sell the whole business to someone who will set up their own structure to hold it. Any profit from the sale should go into the trust and from there it can be distributed to the beneficiaries of the trust.
     
  12. DrJohns

    DrJohns Member

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    I am interested TerryW why you think it better to have 2 companies? Why not just have a non-trading corporate trustee, owned by the children, and their trust operating the business. You get the same tax and asset protection advantages and most of the outside world do not have to know that the company they are dealing with is acting as a trustee.
     
    Last edited by a moderator: 22nd Apr, 2011
  13. Terryw

    Terryw Well-Known Member

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    Hi Dr J

    I think best to have a separate company for each trading entity. The children will be operating their own business so should have their own company and the parents will be operating their own business.

    The trading company could operate in its own right or as trustee. I think there are some differences if the business were to go into liquidation, but I am not sure what these are and I don't know if there are any other tax issues either.

    This may be a good new topic to discuss, what is the difference between operating a busines through a company as trustee v a company with the shares owned by a trust.
    http://www.invested.com.au/4/company-trustee-v-company-shares-owned-38478/
     
  14. tax guy

    tax guy Member

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    If you or your husband owe money to anybody and don't have the funds to pay then your assets could be used to recover the debts.

    So if you do not owe any money to anybody (and you need to make sure you don't owe money to your husbands Pty Ltd as this is also included) then your house will never be at risk.

    Your house is only at risk if you default on debt that you have in your own name. So if the company ends up being liquidated then your house is safe assuming you or your husband personally do not own money to the Pty Ltd company.

    You also need to consider the directors duties under the Corporations Act. Breach of these duties make the director personally liable so if your husband were in breach of these duties and needed to pay settlement then the house could be used as an asset to cover these costs.

    Also any loans that the Pty Ltd has entered into you need to check if personal guarantees were provided on these loans or security of your house. These would also bring the house into play.