The family trust gained popularity as an ownership structure for property and investments to help minimise tax and estate duty and maximise entitlement to residential care subsidies. The abolition of estate duty some years ago, reduced income tax benefits and the increased scrutiny placed on trusts within residential care subsidy applications have all lessened the importance of some of the key benefits of family trusts. However, this does not mean trusts no longer serve a useful purpose.
Trusts are expensive to operate. There is the cost of establishing the trust, the cost of preparing an annual tax return for the trust if it owns income-producing assets, and the annual cost of administering the trust. These costs must be compared to the benefit gained from the protection of assets from a variety of different risks as well as other ancillary benefits. Trusts can provide protection against a number of potential risks, of which the key ones are:
- The possible reintroduction of estate duty
- Claims on personal assets by business creditors
- Relationship property claims
Trusts can also offer benefits, such as the ability to split income to family members on lower marginal tax rates, ease of transition of assets on death, and safeguarding of assets for vulnerable children.
The purpose of establishing a trust should be clearly identified. Trusts which have been established for the sole purpose of avoiding tax or increasing eligibility for government subsidies are unlikely to withstand scrutiny. It is important that trust administration and record keeping be diligently attended to if the trust is to be considered genuine, or not a ‘sham’. Consideration needs to be given to which assets should be held in the trust and how the trust should be structured. Due to the complexity of issues, good advice from a solicitor and accountant is essential.