Family money: Susan Hely
There is an option outside super for protecting and sharing wealth
With wide-ranging changes to super taking effect on July 1, it is worth considering whether it’s time to put your non-super money into a family trust. A trust can tax-effectively distribute wealth among family members, protect your assets from creditors and help with succession planning.
Annual concessional super contributions will be capped at $25,000 from July and, for a wealthier retiree, the maximum that can be held in super will be $1.6 million. Family trusts are one of the few tax-effective vehicles other than super. “Family trusts are going to exponentially grow again,” says Peter Bobbin, managing principal of Argyle Lawyers.
Here are some key questions and answers about family trusts.
How many are there? In 2014 there were 802,645, according to the tax office. Around 20,000 are set up every year, so Bobbin estimates there are 850,000 now.
How much do they hold? $344 billion.
How much money do you need to set one up? Just as self-managed super funds have a minimum recommended amount of around $250,000 to justify the annual costs, a family trust needs at least a similar amount to make it worthwhile. It needs to pay accounting fees and lodge tax returns.
Is there a maximum contribution amount? No, unlike super’s many restrictions, there is no maximum for a family trust.
What are the attractive strategies available to family trusts? One year you can pay income to a low-income spouse; another year you can pay income to a child who is at university, because when they are 18 they can earn $18,200 tax free.
Michael Hutton, head of wealth management at HLB Mann Judd Sydney, says that through a family trust ownership of assets such as a share portfolio or holiday house can continue uninterrupted, even if a family member dies. This is because the individual doesn’t own the asset, the trust does. Consequently, the assets don’t form part of the estate. “Basically this makes family trusts an ideal tool for multi-generational wealth transfer while SMSFs, on the other hand, must be wound up on the death of the last member, which can also raise tax issues,” he says.
How much do they cost to run? This depends on how complicated it is. Annual fees to a tax accountant can vary, says Bobbin. If it is purely for investment purposes, the fee can range from $3000 to $8000 while if it is more complex it can cost $8000 to $16,000. If it is very active, it could cost up to $30,000.
Should you set one up? HLB Mann Judd’s Hutton says a trust should be considered in conjunction with an SMSF, as they work well together.
Who typically uses them? Financial planning and law firms set up family trusts so that they can protect their assets in case they are sued. If you are expecting an inheritance or are a high-net-wealth individual who has maxed out your contributions to super, a family trust could be useful. “This is particularly so if there are low-income beneficiaries in the family group to whom taxable distributions can be allocated,” says Hutton.
How do you set one up? Most are set up with online accountants. Bobbin estimates around 90% are done online. How do they compare with an SMSF? Family trusts are flexible and have no restrictions about when you access the money and no limits on the contributions. They don’t have to be wound up on death, whereas super funds are for retirement and have a preservation age, contribution caps and maximum amounts.
What are the tax rates for family trusts? It depends on who is paid income. “Tax is dealt with on a flow-through basis,” says Bobbin. “It is paid on whether the income is passed through to a child, a spouse or a company.”
Will the tax office take away the advantages of family trusts? “They have made moves forever but the fact is that family trusts are still here. They are still the major structure and so many planners and others have them,” says Bobbin.
Hutton says people tend to ignore family trusts as a wealth management tool because they believe their benefits have been eroded and they are overly complex and expensive. “In reality they are often simpler and cheaper to operate than an SMSF,” he says.
A trust is an ideal tool for multi-generational wealth transfer”