Problems with Trust Structure

Hi there,

Am researching structures to invest in managed funds/shares and now have reservations about using HDT.

In particular, the 80 year life of a trust really hampers our plans to leave a large lasting legacy for future generations. I hope I am wrong, but it seems we would spend 40 years building up a big family fortune, then hopefully our children would spend another 40 years adding to it, only to have the whole thing wound up or rolled over into a new structure at the 80 year mark. This would happen when my kids would be about 90, and grandkids about 60 - not a time in life when they want to have to deal with this, and not a very effective way to pass on wealth.

I hope I am wrong, but would not the winding up/rolling over of trust involve huge CGT and stamp duty, which would probably require a large part of assets to be sold. (We are firm believers in holding onto assets wherever possible). Yes, there will be a lot of wealth in trust by then, and it is better than nothing, but surely there is a better way?

Renton, in his book on Trusts, makes the point that in the early 2000s the liberal govt nearly changed law to tax trusts at company rate, and even worse, to remove deductibility of loans used to buy units in trust.... and this was a liberal govt.... one wonders what a labour govt would do in the future when short of cash to fund welfare programs. Renton says that if these changes did go ahead, then family companies would be much more attractive options, as they do not have a time limit and can last forever.

Obviously companies have less asset protection and CGT benefits. Though company tax of 30% is not much more than 25% rate which usually applies for CGT.
Maybe one way around asset protection problems with company is to ensure all directors and family share holders have pre-nuptial agreements and public liability insurance, and only voting rights to limited members etc. Another option is the testamentary trust (but 80 year limit applies there too) or we could just buy managed funds in our names and spread them around the family if income gets too high, making sure everyone has pre-nuptial agreements and insurance. No CGT or stamp duty is incurred when assets are inherited, until sold (at the moment anyway)

My preference is leaning towards a family company which offers limited liability and some asset protection. We could also pay ourselves and children salaries as directors, plus dividends, franking credits and special bonuses etc. I wonder if we could get a company car too ... seriously, does anyone know, our old one is on its last legs?

We are less concerned about losing wealth to litigation, than losing it to the government by stealth (tax) - and it seems this 80 year rule for trusts mean that the government do get their share, if not sooner, then much later.

I really hope I am wrong about all this and hope somebody can shed more light on what happens when trusts wind up, and the best way around this for managed fund/share investments. We do not want to put any IPs in a structure at the moment, but maybe in future.

Thanks for any thoughts on this. I should receive Dales book Trust Magic soon, and perhaps that will put these concerns to rest, tho' I am not so sure.

Cheers
Seaview

 

Hi Seaview

Yes the old rule vs perpetuities is a problem for trusts giving them effectively an 80 year lifespan (altho curiously this does not apply for superannuation funds).

Without going into all the details, there is an argument that a trust created in South Australia is not required to automatically vest, rather their trusts legislation gives a power for various people (including the attorney general and the beneficiaries) to apply to court to have the property of the trust vest at or after the 80 year mark.

The trouble with using a company to hold appreciating assets is that you don't get the benefit of the CGT discount nor do you have the same distribution flexibility you have with a discretionary trust.

N.

 

Hi Seaview
All valid points and you are correct - upon vesting date the assets of the trust will spill out to the beneficiaries.
The trust will provide significant advantages over a company during the 80 years. If your primary concern is in 80 years time, we would instill a company as a corporate beneficiary, hence taking full advantage of all personal tax brackets before allocating income to a company.
I think this resolves the tax issues at the end.
Unfortunately I do not envisage being around in 2087 to assist in the wind up.

Cheers
NickM

 

Trust Cloning

Hi Seaview,

Regarding your CGT concerns when vesting the orginal trust you should be aware that if the trust deed is drafted correctly you should be able to form an identical trust and transfer the assets into the new but identical trust without incurring CGT. This is more commonly known as trust cloning.

Cheers,
Teevo


This is a general comment only and does not constitute financial advice. Before making any financial decision you should always consult a licensed professional, who can take into account your specific circumstances and investment goals.

 

Trust cloning has some very specific rules including that the clone vests at the same time as the original trust. Obviously advantageous in dividing assets between beneficiaries in relation to CGT.

 

Hi Seaview,
there is interesting free information on this site: Tax Professionals Welcome if you haven't already been to it.

Terry

 

Your obsession with avoiding tax as your primary motive may force you into situations/structures that you later regret.

If you defer CGT for 80 years, look at the present value - not the absolute figure in 80 years time. Its not that scary if you get 80 years of compund growth out the deferred tax liability.

Also, eventually control of any company/trust will pass to somebody else and hence control of the assets.

Cheers,

Rob

 

This would infringe the rule against perpetuities if the second trust vested after the first trust.

Also I think the ATO has tightened up their rules on this so that it may no longer be possible to clone wthout CGT issues.