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Olivia Maragna
James asks:
A colleague of mine has recommended that I look into establishing a family trust instead of buying investments in my own name. My tax rate is over 40 per cent and I accumulate a large amount of extra savings every month and want to invest it without paying too much tax. Is this a good idea?
Olivia says:
There are many types of trusts and which one you should choose depends on many factors such as the type of investment, whether you will require a loan, your marriage status and your susceptibility to being sued. The most common type of trust thought is a discretionary trust, commonly known as a family trust.
Basically a family trust is a vehicle to accumulate investments that are protected, with the profits distributed in the most tax-effective way. A family trust allows the trustee to use their discretion in distributing funds to the beneficiaries, which is where the real value of a trust can occur.
Here is an example of how this can create wealth.
Consider a couple earning $85,000 each with two dependent children.
One child is 21 and the other is 19. The 21-year-old works part-time
while studying and earns $12,000 a year. The other child doesn't earn
any income and is a full time university student.
They have a family trust and have accumulated investments in their trust over several years. This year it has generated a profit of $23,000. Because the fund is discretionary, the trustee can distribute the profits at their discretion.
If all of the money was distributed to the parents, they would pay 37 per cent (their marginal tax rate) income tax on the full $23,000, an additional $8510 tax on what they are already paying.
A colleague of mine has recommended that I look into establishing a family trust instead of buying investments in my own name. My tax rate is over 40 per cent and I accumulate a large amount of extra savings every month and want to invest it without paying too much tax. Is this a good idea?
Olivia says:
There are many types of trusts and which one you should choose depends on many factors such as the type of investment, whether you will require a loan, your marriage status and your susceptibility to being sued. The most common type of trust thought is a discretionary trust, commonly known as a family trust.
Basically a family trust is a vehicle to accumulate investments that are protected, with the profits distributed in the most tax-effective way. A family trust allows the trustee to use their discretion in distributing funds to the beneficiaries, which is where the real value of a trust can occur.
They have a family trust and have accumulated investments in their trust over several years. This year it has generated a profit of $23,000. Because the fund is discretionary, the trustee can distribute the profits at their discretion.
If all of the money was distributed to the parents, they would pay 37 per cent (their marginal tax rate) income tax on the full $23,000, an additional $8510 tax on what they are already paying.
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