YOUR PROTECTION - TRUSTS & BUSINESS STRUCTURE
Are you concerned that with so many employees that one may get injured on a machine, a customer may sue for damages, or a mild cashflow crisis pushes a creditor into legal action against you. New legislation now is making directors liable for not only unpaid BAS statements (especially PAYGW) but also super guarantee after non-payment for three months.
As your accountant, we can review your situation so that the best asset protection strategy is in place to help alleviate your concerns.
It could be that you are a start-up or about to take your business to the next level. Why not start with the right structure for your business to minimise costs in future should you require to restructure. However, it is never too late! So do not be alarmed, we can provide detailed advice on an efficient strategy to restructure your current business should we identify any risk elements.
Enjoy the peace of mind that comes with knowing that your risks are mitigated, and your business is protected against exposures.
You want a structure that can:
Save you tax dollars
Increase your profits
Reduce your business risks
Protect your personal and business assets
Enjoy your earnings
In business and in your personal life, you want peace of mind that your assets are protected. Owning assets through a trust provides a high level of protection from risk.
A trust is a legal arrangement where the trust and assets are controlled by a person or company (known as “trustee”) for the benefit of the beneficiaries. Assets held by the trust would be out of reach from any potential lawsuit against you because the legal title of the assets are held with the trustee and the beneficial interest of the assets belong to you, your family or your business.
The added benefits of trusts include income splitting to legally reduce taxes and passing on assets to future generations without any tax or stamp duty consequences.
Does your structure allow for protection of your hard-earned asset portfolio? Call us for a review.
TYPES OF TRUSTS
What is a trust?
A trust is an arrangement under which a person holds property or assets for the benefit of others. The person holding the asset or property is the trustee. The people or companies for whose benefit it is held are the beneficiaries.
Unlike a company, a trust is not a separate legal entity, although it is treated as a separate entity when it comes to registering for tax. That means the trustee is liable for any of the trust’s debts, which is why many people choose to have a company as trustee.
Trusts can be set up by deed during a person’s lifetime, or by will to take effect after the person’s death. Trusts established by will are known as testamentary trusts.
Why set up a trust?
There are many reasons someone would choose to set up a trust. These include:
To separate the owner of the asset (the beneficiary) and control over that asset (the trustee), e.g. where the beneficiary is under age or suffers from a disability that affects their decision making
To provide greater flexibility in tax planning
To protect assets from financial claims made against the beneficiary, and
To use as a business entity either for investing (for example, to purchase real estate or a share portfolio) or for trading.
What does a trust need?
Any trust needs a number of elements before it can start operating:
The settlor: The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons, the settlor should not be a beneficiary under the trust.
The trustee: The trustee (or trustees) administers the trust. The trustee owes a duty directly to the beneficiaries and must always act in their best interests. All transactions for the trust are carried out by and in the name of the trustee.
The beneficiary or beneficiaries: The beneficiaries are the people or companies for whose benefit the trust is created and administered. Beneficiaries can be either primary beneficiaries (who are named in the trust deed) or general beneficiaries (who often are not named individually). General beneficiaries are usually existing or future children, grandchildren and relatives of the primary beneficiaries.
The trust deed: The trust deed (or, in the case of a testamentary trust, the will) is the formal document which sets out how the trust will run and what the trustee is allowed to do.
The appointor: Many, but not all, trusts also have an appointor. The appointor is very important as they have the power to appoint and remove the trustee.
What different kinds of trusts are there?
There are many, different kinds of trust. As well as the types of trust described below, trusts include superannuation funds, charitable trusts and special disability trusts.
The two main types of trusts which are used in business and by individuals are:
Discretionary (or family) trust: A discretionary trust or family trust is the most common form used by families. The beneficiaries of the trust have no defined entitlement to the income or the assets of the trust. Each year, the trustee decides which beneficiaries are entitled to receive the income and how much they should get. For this reason, discretionary trusts have become popular in family tax planning.
Fixed or unit trust: Unlike a discretionary trust, the beneficiaries of a fixed trust have a defined entitlement under the trust, similar to a shareholder in a company. This is usually done by dividing the trust into units in much the same way a company is divided into shares. The trustee doesn’t have any discretion as to how they distribute the trust’s capital and income. A fixed or unit trust is often used for joint venture arrangements – for example, two families want to own an asset together.
How long does a trust last?
In NSW, a private trust can last for up to 80 years. The trust deed will set out how long it should last and can specify a shorter term – often based on a specific event happening, such as someone dying or reaching a certain age. The date when a trust reaches the end of its term is known as the ‘vesting date’.
What happens on the vesting date?
When a trust vests the beneficiaries become absolutely entitled to all of its assets and income. The trustee must distribute all assets and income to them in line with the trust deed. A trust deed will usually have a set of rules the trustee must follow when doing this.
Does a trust pay tax?
A trust has its own tax file number and is required to lodge tax returns annually. However, the trust generally is not subject to tax if all its annual income is distributed to beneficiaries, who pay the tax based on their marginal rate of tax. Where the trust conducts a business enterprise it can register for both an ABN and GST.
MYTHS OF ASSET PROTECTION
“I can do it later”
Do not wait until you have a crisis. Transferring of assets into other companies, trusts or persons name after you have specific exposures is costly, ineffective and in some cases illegal. The best time to act is now.
“I’m not rich enough to worry about asset protection”
We analyse this common statement by asking the relevant questions:
If you lost what you have today, or some significant portion of it, are you at an age, earning level and financial condition that will allow you to maintain your family’s goals and expenses?
Do you have assets that would be difficult or impossible to replace given your age, health and economic conditions?
Are you financially and legally prepared for a lawsuit that is either not covered by liability insurance or which often produces verdicts above the limit you are carrying?
“I don’t need asset protection because I have insurance”
Insurance will not protect you for every possible scenario.
An example may be if you sold products and they were deemed defective you would be responsible to replace or refund the consumer in accordance to the consumer protection laws. However, the supplier you purchased the goods from are uncontactable and have gone into liquidation. A product recall may put a huge strain on your business and it may leave you in a position of make or break.