Retaining your family trust could be important
With the recent increase in the trustee tax rate to 39% and changes introduced by the new Trusts Act, some clients have questioned whether they still need a family trust. The answer is not a “one size fits all” approach and depends on your personal circumstances.
Some reasons why retaining your family trust could be important include:
Creditor protection
If you are engaged in business or work in an industry subject to potential liability claims, having assets held in a family trust can provide a degree of protection.
Generally, the longer the assets have been held by the trustees, the better the protection. However, you cannot transfer assets to a trust in an attempt to defeat the claims of your creditors – transfers must take place when you are solvent.
Income-splitting
If you have a trust that earns income (rental income, dividends from shares etc), that income can be distributed to beneficiaries over the age of 16 years at their marginal tax rates.
Otherwise, the trustee tax rate is 39% (for income over $10,000 per annum) or 33% (for income less than $10,000 per annum). This can be useful if the beneficiaries of the trust include young adult children who may be at university or elderly parents that you have been supporting from your after-tax income.
Income can instead be distributed to them by the trustees and taxed at a much lower rate if those beneficiaries are only working part-time or are on a pension.
Inheritance planning
Retaining a family trust can be useful as it means your children and grandchildren will not inherit assets in their personal names upon your death. This can protect them from relationship property and creditor claims. Instead, your children and grandchildren will be considered by the trustees and distributions of capital and income made to them accordingly.
Trustees are guided by your wishes, which is why it is important to have an up-to-date memorandum of wishes in place. This sets out your wishes about the assets held by the trustees and the beneficiaries of the trust.
Having a family trust can also be useful if you were to die before your spouse, as it can make it more difficult for any future partner of your spouse to make a relationship property claim (except in relation to any property which is occupied as the “family home” – which is a blog for another day). You can also direct your parents to leave your inheritance to the trustees of your family trust, rather than to you personally, if you are concerned about creditor protection.
Our recommendation
It is important that your trust documentation is up-to-date and we recommend that all trust deeds are reviewed and amended in light of the changes introduced by the Trusts Act 2019. You should also ensure you have an up-to-date memorandum of wishes to guide the trustees.
Please get in touch with us if you would like to discuss your family trust.
