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Structuring the Ownership of Shares

Discussion in 'Accounting, Tax & Legal' started by Terryw, 14th Dec, 2016.

  1. Terryw

    Terryw Well-Known Member

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    Quick summary - a discretionary trust is a great way to hold shares.


    An ideal way to own shares would be via a discretionary trust. The main reasons being
    • a) Asset protection against creditors of the beneficiary, and
    • b) Tax savings

    A discretionary trust will generally give good asset protection on any growth in value of the shares. Any loan giving to the trustee will be an asset of the lender so no asset protection if the lender were to become bankrupt. A gift will give good asset protection if the giftor later went bankrupt, but the gift could be clawed back in the first 5 years and possibly later if the gift was to defeat creditors.

    Tax savings can be achieved by the trustee distributing income to a wide range of potential beneficiaries – including companies.

    The trust should probably be an open class trust for greater asset protection and flexibility. It should also have the power to accumulate income for added asset protection. It would also be a good idea for the trustee to have the power to make loans to beneficiaries, or anyone, on interest free terms too. As well the usual powers to invest and mortgage trust assets, borrow money should be included.

    The trustee could be an individual. There are generally little to no risk of the trust being sued if all it does is invest in shares that are publically traded. Having a company can add flexibility as control can be passed without changing title to the shares (e.g. on death or insanity). If an individual is to be trustee then one is preferred to two trustees.

    The role of the appointor should be ‘you’. It is the most important role and you need to make sure you are the one that controls the trust. You should consider a second appointor for greater asset protection – so that it cannot be said that one person solely controls the trust. And a back up appointor, or two should be in place.

    Funding the trust should be carefully considered. To buy shares the trust will need funds. These generally come from the person behind the trust and will be either a gift or a loan. Where you will be sourcing the funds from a LOC or borrowing from a bank you should lend the money to the trustee. Where you have piles of spare cash lying around you should seek legal advice on whether a gift is appropriate and what the consequences will be.

    If you lend money you need to enter into a written loan agreement with the trustee. Difficulties will arise where you are the lender and also the trustee as you cannot enter into a contract with yourself. You need legal advice on the loan agreement too – on the terms and to consider what if you died. Also need to make sure loan payments are made as the loan could be unenforceable if there are no transactions after a certain period – 6 years in NSW.

    Where a gift is made you should clearly document it. A deed of gift is a good idea and it should be properly witnessed.

    Once the trust has funds it can then buy shares.

    Where the trust borrows to buy income producing share the interest on the loan would generally be deductible against the trust’s income.

    Where dividends are paid the trust may need to make a family trust election for the franking credits to be distributed. This will limit the potential beneficiaries of the trust, as such the trust that owns shares probably shouldn’t own other assets – keep them segregated.

    As the income of the shares increases there may be an option to add in a company as a beneficiary – a bucket company. Income could be distributed to the company and the company would pay 30% tax on the income and retain the rest. This can be a good idea if the main beneficiaries of the trust are on marginal tax rates over 30%.

    The bucket company should be set up with its shares owned by a discretionary trust as the value of the company could become large and to allow for flexible distribute of income of the company via franked dividends. One strategy is to distribute to the bucket company and then have income paid out to the kids when they reach the age of 18 and are not working – such as when at uni.

    The family or associate trusts could not borrow or benefit from the bucket company and its income otherwise it could be deemed that a dividend is paid and that would be taxable. If you do need money you can always cause the trust to distribute more income to you – at the top level, or the bottom level from the bucket company.

    Once the bucket company has some funds available it could then invest in shares with those retained earnings. It could also invest in property – but it is best not to directly invest in property but to set up a second company and have the bucket company lend this other company the deposit for the property. This will give some added asset protection in case the tenant sues.

    The trust can also assist in debt recycling. You pay down your PPOR loan by say $50,000 and then split it and lend $50,000 to the trust to invest. The trust returns interest and dividends which will help you pay off the next $50k chunk faster. And so on.

    Remember that assets of a trust do not pass via your will upon your death. The trust keeps on going under new control. You have to make sure that the appropriate person(s) control the trust. An alternate strategy is to cause the trust to be vested upon your death and the income and capital to pass to you and then through your will into a discretionary trust in your will – one for each child perhaps.

    For the benefits of a testamentary discretionary trust see:
    Legal Tip 23: Why Set up a testamentary trust https://propertychat.com.au/community/threads/legal-tip-23-why-set-up-a-testamentary-trust.1262/
     
  2. KJB

    KJB Member

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    My plans are/were -

    Set up disc trust, with a corporate trustee with me as the shareholder (Because I cant lend $$ to myself. Correct?)

    Lend (from my name) from savings quarter or semi annually (maybe LOC's later on down the track) to trust

    Having Same company as beneficiary and doing on paper distributions each year and just rolling everything over to compound away (Can I have same company as beneficiary and trustee ?)

    however....


    Does the above mean I need 2 trusts?

    Trust #1 as the shareholder for the company which acting as trustee and beneficiary for Trust #2

    and if so who should be trustee of trust #1?



    Appreciate your input @Terryw , every time I think I've sussed something your posts remind me I haven't hahaha..... the joys of learning :)
     
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  3. Terryw

    Terryw Well-Known Member

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    You can’t legally lend money to yourself but you could structure it so that the trustee has an obligation to return the money you put into the trust. I would still enter a loan agreement with yourself – although it may be strictly invalid it does show the intention of your temporarily putting money in the trust. You could also have a deed pole – which is a deed with only one party.



    The same company as trustee and beneficiary? This would weaken asset protection too. The one company is doing two things – owning some assets in its own right and other assets as trustee. If a trustee is sued its personal assets are at risk – but probably a very slim chance of a company that only holds shares being sued.



    I guess for either scenario Estate Planning is perhaps the biggest consideration.



    I would prefer 2 trusts too.



    Legally there is nothing stopping the trustee of the shareholding trust being the shareholder of the bucket company. However it weakens asset protection because of the circular nature of money flow.



    There are probably other reasons too, but this is all that I can think of.
     
  4. Hodor

    Hodor Well-Known Member

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    Fantastic I was trying to answer that, or find a solution with a single trust.
     
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  5. KJB

    KJB Member

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    I get how this weakens asset protection, but from a view of compounding would this be a better option.
    or
    can you still have your cake and eat it too, I recently re read 'trust magic' and basically you can just do on paper distributions each year right?


    Now lets see if I'm getting all this right though...

    so, hypothetically.

    Trust 'A' has Company 'A' as trustee

    Buying industrial dividend paying shares with Company 'A' on behalf of trust 'A'

    Trust 'A 'distributes' - only on the books - no actual payments to Company B (beneficiary)

    Company 'B' has Trust 'B' has the shareholder

    years pass and dividends are reinvested, cap growth ticks along and everything's compounding away nicely, with each year 'distributions' made on paper.

    is this the better way to keep everything compounding optimally? - that is just having it all stay in one company name?

    and if so would you only start to make actual distributions to company B when

    - you want to start living off some dividends e.g Distribute from Company 'A' to Company 'B' (whose shareholders are trust 'B' who then distributes them to you/wife/kids?)

    and/or

    someone is trying to get at assets in trust 'A' so.. you distribute everything out of trustee company 'A' to beneficiary company 'B' and put a new trustee in place (for Trust 'A')

    Pretty sure something just burst in one lobe or another o_O

    Thanks

    Kayne
     
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  6. Hodor

    Hodor Well-Known Member

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    I know how you feel. Think I need to bite the bullet and organise some professional advice regarding all this so that I can be done with it.
     
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  7. Terryw

    Terryw Well-Known Member

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    Trust magic is a dangerous book.

    What about Division 7A?

    Best to physically distribute I think.
     
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  8. KJB

    KJB Member

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    So (using the example above) would I just be distributing only dividends from Trust/company 'A' to company 'B' and keeping the original capital + cap growth in trust/company 'A'

    and as long as I'm just buying into similar dividend paying stocks/lics when i distribute the funds to company 'B' (beneficiary) I'm still effectively getting the same result of compounding, dividend reinvestment etc etc... but just spilt over 2 companies and a trust? right? (please say yes :p)

    also...

    once everything is distributed into company 'b' (the beneficiary) is there a law or tax ruling or something that says I have to distribute to the shareholders (effectively me via trust 'B') ? or can that just be left in the company and distributed at my(company 'B's) discretion?


    I know I said I would be contacting you later on Terry, might have to move that up so I don't short-circuit :confused:o_O:eek:
     
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  9. KJB

    KJB Member

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    on a side note .. are we the only 3 ever on here??
     
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  10. Terryw

    Terryw Well-Known Member

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    You would want to try get more money into the trust rather than the company as trusts can get the 50% CGT discount. but other than that it is pretty much the same whether the money is in the company or the trust.
     
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  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Nope - past 30 days have seen posts from 37 different users.

    Lots of new users starting to sign up too - we're making progress in rebuilding the level of traffic!
     
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  12. KJB

    KJB Member

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  13. KJB

    KJB Member

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    OK.. I've managed to get what's in my head onto paper (I need colours and pictures, scratch and sniff couldn't hurt either hehehehe)

    Is this about right?
    - Basically using blue trust and company to invest then, distributing to bucket company
    - Having all dividends stay in and reinvest in bucket company over expected time horizon?
    - End result some shares in blue trust/company (as the share price/capital growth hasn't gone anywhere - only the dividends each year
    - Majority of shares in green bucket company

    I hope this makes sense, I've gone a bit cross eyed looking at for more of last night then im keen to admit.

    So @Terryw , whenever your ready, go ahead and ruin my day by telling me it all wrong.. just jkz :) ..... I hope :)

     
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  14. Terryw

    Terryw Well-Known Member

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    Yes that is about it.

    But the majority of the shares would probably be in the blue trust.

    If you lend the trust $1mil and it buys shares which pay 5% in dividends that is only $50k in income which would be distributed to the green bucket company which would pay $15k in tax and be left with $35k to buy shares with. Its going to take a long time to catch up to the trust.
     
  15. KJB

    KJB Member

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    if they are all fully franked dividends wouldn't that mean I effectively not paying any tax?? as dividend has been paid out with 30% company tax rate credit .. and I'm paying 30% tax with my bucket company?
     
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  16. Terryw

    Terryw Well-Known Member

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    You are right, if fully franked dividends are paid the company which the shares related to would have paid 30% tax on the profits already to the company that holds the dividends would get imputation credits on these shares which match the amount of tax the company would have to pay - which would mean no further tax is payable.
     
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  17. austing

    austing Well-Known Member

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    He he, like point 6. Not sure dogs and rabbits are deemed eligible beneficiaries by the ATO:D.
     
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  18. KJB

    KJB Member

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    could you have a dividend reinvestment plan in a trust? or would this cause issues each year at distribution time.
    e.g.would have to sell some shares to get back the income you are required to distribute?
     
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  19. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You should be able to distribute on paper (we do this all the time in our trust), but there are potential ramifications from a asset protection point of view, because it becomes a loan from the beneficiary to the trust and it may have a negative impact on the tax situation of the beneficiary - so it would depend on the circumstances as to whether it's a problem or not.
     
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  20. Terryw

    Terryw Well-Known Member

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    Sim is right. A trust must distribute its income otherwise the trustee is taxed at the top marginal rate.

    If the trust doesn't distribute it would be an unpaid present entitlement - which is different to a loan. It is an obligation in equity. These can create all sorts of problems especially at death.

    I personally think it better for the trust to distirbute and then for the individual to loan or gift money back to the trust. This keeps things nicer and more tidy, but if it is a loan there still can be problems at death so consider whether you should forgive the loan in your will or not (might be better not to so the funds can get into a testamentary trust with added tax benefits).