Are you running an SME that’s starting to really pick up speed? If you’ve started to accumulate significant assets, it could be time to consider a family trust as part of your business strategy.
If you’re continuing to hold property or large amounts of capital in a trading business or a company structure, then you’re exposing yourself to extra taxes & unnecessary risk.
Setting up a family trust is a much more secure & tax-effective way to protect your assets so that you can pass them on to the next generation.
What is a family trust – and how does it work?
Essentially, a family trust is a legal entity that holds property or assets for the benefit of (“in trust for”) the beneficiaries – that’s you & your family.
The entity holding the property and assets in the trust is called the trustee. This entity can be an individual or a company, but we always recommend a corporate trustee. I’ll explain why later.
The property and assets are the trust fund from which income is derived. Everything is set out & governed by the trust deed, which establishes how the trustee deals with the assets of the trust fund and the income it generates.
A family trust is also referred to as a discretionary trust, because the trustee can distribute the income at their discretion. They can choose & change the amount each beneficiary receives.
This differs significantly from a unit trust, where the income from the trust is distributed in fixed amounts. It also makes a family trust an ideal vehicle for transferring wealth flexibly between family members.
When should I consider a family trust?
It’s a good idea if the amount of capital you’re holding in your company far exceeds the amount of working capital you need to run your business, or if you own significant assets like property. (Although we wouldn’t recommend holding your main place of residence in a trust.) It’s also a good place to hold shares in your business.
For instance, we recently sat down with one of our clients. She’s been with us for a few years, and her business has been growing fast. She first approached us as a sole trader, and we’ve since helped her incorporate her business as a company.
Now, she’s planning to buy a property as their new business premises. So we’re helping her set up a trust to hold it in.
Why do we recommend this? There are a few good reasons.
It provides extra security
When you’re holding assets within your company structure, they’re exposed to risk. If your business gets sued, or you go into debt, you could lose them. This is doubly true for individuals or sole traders, who hold their assets personally.
A family trust shields you from these issues. Because your assets belong to the trust, not you or your business, the assets are protected in case something goes wrong. It’s always a good idea to divide your assets into different buckets, and a trust is arguably one of the most solid buckets out there.
For extra protection, we always recommend using a company as your trustee. This is because assets held by individual trustees are also vulnerable to litigation against that individual. There’s also a chance they could die or become incapacitated, complicating your affairs. It’s safer to always go with a corporate trustee.
It’s flexible – and potentially more tax-effective
This is one of the biggest benefits of using a family trust. All income earned on the trust must be distributed to the beneficiaries, who are then taxed at their individual income tax rate.
This means that if you distribute income to a beneficiary in a lower tax bracket – like your young adult children, for instance – it could potentially help you save on the flat corporate tax rate of 25% or 30% (based on 2021-2022 rates & company size) that you’d be paying if you were holding the money in your company structure. You can also redistribute capital gains when assets are sold, or allocate different percentages of different income types to certain beneficiaries.
Another benefit is that if you decide to sell your business in the future, the flexibility offered by a family trust makes it considerably easier to meet the requirements for the Capital Gains Tax concessions.
It’s worth noting that the potential extra profits from restructuring may be partially offset by the extra administrative costs associated with running a trust, at least initially. It’s also important that any transactions you make can be justified as having a commercial or practical purpose, not motivated purely by taxation. The ATO has a number of anti-avoidance laws designed to catch this out.
Trusts are designed for passing on your wealth.
If you’re running a family-owned SME, there’s a good chance you’ve been building it to support your family. You want to have something that you can pass onto the next generation.
It’s a story we hear often from our clients, and it’s a driving force behind what we do at Rees Group. When you build a business the right way, you can help your family enjoy success for generations to come.
Because of their flexibility, trusts can make the succession process even easier. It’s why most farms across Australia are held in family trusts. With a legal lifespan of 80 years, trusts are designed with intergenerational wealth transfer in mind.
Thinking of establishing a family trust?
Does this sound like something that could work for your family business?
Rees Group can help you establish a family trust. Our advisors will guide you through the whole process in a manner that feels simple, effective & easy to understand.
We can provide advice on every stage. We’ll walk you through the set-up steps – like appointing a trustee & establishing a settlement – as well as providing advice on more advanced matters, like succession plans, taxation advice & business re-structuring considerations. We’ll make sure your family is in the best position to succeed.
In fact, by seeking out business advice at this stage, you’ll be getting a clear edge over your competitors. According to a recent study by ScotPac, two out of three SMEs are looking at financially restructuring their business, but only 18% take on strategic advice beyond tax and compliance.
By engaging with clear, strategic short and long-term planning at an early stage, you can help your business and your family secure their future and get ahead of the pack. Get in touch with us today if you’d like to talk more about what a family trust could do for you.
Disclaimer: This advice is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether this advice is suitable for you and your personal circumstances. We strongly recommend seeking out professional advice before acting.