Family Trusts – Who should I Distribute the income to?
What is a family trust?
A family trust (otherwise known as a discretionary trust) is set up to hold a family’s assets or to conduct a family business. A family trust allows certain asset protection and tax benefits that other investment structures do not.
What are the benefits of a family trust?
With a family trust, the appointed ‘trustee’ has ultimate flexibility as to who receives the income derived by the trust for the year. This ability to determine who receives the income, allows the trustee to use the income tax brackets of the entire family group to achieve the lowest (legal) possible average rate of tax. Reducing the average rate of tax is a key objective of any tax planning strategy.
Trusts are able to benefit from several other tax concessions such as the 50% Capital Gains Tax discount where assets are held for at least 12 months.
What should I set a family trust up for?
If you have recently come into a lump sum of cash and want to invest, have decided to purchase an investment property or want to purchase a large value of shares (to be held for an extensive period of time), you should strongly consider setting up a family trust.
All the above situations described are what this structure is designed for if you wish to be tax effective in the long run.
Who should I distribute the income to?
When considering who to distribute the income of a family trust to, it must be noted that all income of a family trust must be distributed to beneficiaries each financial year (or else it is taxed at the top marginal rate).
The first person we recommend distributing income to is you. The ‘sweet spot’ of income distribution is roughly $90,000. We are utilising the tax bracket of 34.5%, as when you start earning over $90,000 you are then taxed at 39.5 cents on the dollar. If you begin producing more than $90,000 in the trust and all members of the family group are not able to effectively use this structure, another company can be set up to make the most of the 27.5% small business tax rate (soon to be 26%).
The second person you should consider distributing to is your spouse, especially if they are a stay at home parent. This situation is perfect for a distribution from a family trust, as you can utilise the tax-free threshold of approximately $22,000 when considering tax rebates for low income earners. So by setting this structure up, instead of you getting taxed 39.5 cents on the dollar, this income can go straight to your spouse tax free.
The third person/people that come to mind are retired parents. For this to work, they need to be receiving no taxable income (most super pensions are tax-free). If they are receiving a Centrelink old age pension, that may defeat the purpose of this strategy as their tax-free threshold will already be in . You can also consider distributing to your children, however any children younger than 18 years can only receive $416 or less. If you’re children are at university and earning little to no income, they are a prime candidate to receive a trust distribution.
If all other options listed above are deemed uneconomical, the final option to receive a trust distribution is a company.
Please note that the purpose of making trust distributions is to maximise the benefit of each person’s tax brackets to achieve the lowest average rate across the group.
How do I set one up?
There a few important parties and components to a Family Trust which must be done:
- The settlor must be appointed. They are responsible for giving the assets to the trustee(s) to hold for the benefit of the trust’s beneficiaries established in the Trust Deed
- The Trustee(s) must be determined. They are responsible for the trust and it’s assets. We always recommend having a company act as trusteed instead of 1 or more individuals.
- The Trust Deed must be created by the settlor and trustee(s). This deed is the governing document of the trust, detailing how it must operate and other important components such as beneficiaries.
If you wish to find out more about this, contact Link Advisors for a discussion around whether a Family Trust would benefit you.
The information provided above should be considered as general in nature, and not interpreted as legal advice.