Family trusts need rethink
INCREASINGLY I find myself suggesting to clients that they should consider winding up their family trusts. This is in complete contrast to when I wrote the first edition of my family trust book in 1995.
In those days, there were a lot of ways that family trusts could be of benefit, and people of really quite modest means settled trusts: There was the superannuation surcharge (widely hated, especially after a broken political promise to remove it); rest home subsidies; tax advantages; and several other concerns that could be alleviated with a family trust.
A family trust was a really good idea for a lot of people.
That was then, this is now – gradually, piece by piece, over the years the benefits of trusts have been eroded. Sometimes this is because the things that concerned people have gone (superannuation surcharge was abolished in 1998) but mostly because there has been a tightening of the law in many areas.
Tax changes in 2001 meant that minors (under the age of 16) who received beneficiary income are taxed at 33 cents instead of their own, lower rate. This took away the benefit of income splitting from a trust for most people. Subsequently, lower tax rates for companies and individuals (but not for trusts) has meant that family trusts are no longer a very efficient tax entity for asset ownership. While a few people may get a tax benefit, tax is no longer a good reason for most to settle a trust.
Rest home subsidies are also now much more difficult. Work and Income is applying more stringent rules than it did and the use of a trust to be able to successfully apply for a subsidy requires time and planning. The increase in 2005 of the exemption threshold for a subsidy was negated by the rise in house values and the repeal of gift duty has seen much tougher rules and policing by Work and Income.
Courts seem to be looking through trusts now and, where they see them as a device for some kind of avoidance, are happy to overturn the trust arrangement.
The Petricevic case, where the former boss of failed finance company Bridgecorp, Rod Petricevic, applied for legal aid, saw a trust being treated as if it were family assets and Petricevic was declined legal aid. This was even though Petricevic was not a beneficiary of the trust.
This erosion of the benefits of forming a trust is not to say that trusts have no use at all. Trusts are very useful in succession and also for protecting family assets (such as the family home) when one of the partners owns a business. Most businesses have some risk (and some have a lot of risk). It is a good idea to have non-business assets put in trust so that if the business does fail, some assets are still available for the family.
Family trusts still have a role in protecting assets from relationship claims. Provided the trust was formed and assets transferred before the relationship started, there may be some protection if the relationship later fails. Inheritances and gifts to children may also be better protected from being relationship property if they are given to a trust for the children rather than to the children themselves.
There are still a lot of uses for trusts, however, a lot of the more popular things for which trusts used to be formed are no longer as compelling as they were and, for lot of people, it is time for a review.
If you have settled a trust and the purpose for which you settled is no longer valid, or you have not managed it properly, you ought to consider winding it up. The trust will have a cost to you in terms of both time and money to administer. It will also make your affairs more unwieldy to manage (if there is a trust involved, you have to think of all of its beneficiaries before you buy or sell something; if there is no trust, you think only of yourself).
There are two questions you should ask: Why did you form the trust in the first place? Are those reasons still valid? If you are not clear on the original reasons and/ or if they are no longer valid, you should make an appointment with your lawyer or accountant and reconsider the whole thing. It may be that you will save yourself some time and money. Martin Hawes is an authorised financial adviser and his disclosure statement is available free of charge at martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.