Clarification on Family Trust / Bucket Company structure

Hi Everyone,

I was keen to get your thoughts on the below so I feel (somewhat) well prepared before I have a chat with my accountant/lawyer.

Current Situation

• My husband is an individual trustee/appointor of our family trust (Trust A) - not able to use a corporate trustee due to our unique circumstances.
• Trust A's assets comprises of shares in his business (where he is a part owner) and the dividends are the sole income of the trust.
• My husband also earns a salary so no PSI issues with distribution of the share dividends.
• [Not sure if relevant] but we have a PPoR that we are still paying off and an existing small shares portfolio held individually.

(Potential) Future State

• We are looking to setup a bucket company for the Trust A as we are both on the highest marginal tax rate.
• Setup a second trust (Trust B) that will be the shareholder for the bucket company. I understand that Trust B will have to be created prior to the bucket company.
• Intending to reinvest the distribution to the bucket company into indexed shares.
• The indexed shares are for the purpose of use in retirement/to bequeath to future children i.e. we live modestly and our incomes are sufficient to cover all our living expenses.

Questions

1. For Trust B is it recommended to have a corporate trustee or an individual i.e. my husband?
2. Is there particular benefits/reasons why the bucket company might have different share classes and very broadly what would this setup look like?
3. Based on all the forum posts/tips I could find, I gather the best way to reinvest the bucket company distribution is to loan to a trust (thru Div 7A compliant loan?) and then have the trust own the assets to maximise CGT and income tax benefits.
4. Can we use Trust A as the vehicle for reinvestment i.e. Bucket company loans its distribution to Trust A in a Div 7A compliant manner? Or is another method recommended?
5. Are there any other risks/areas of consideration that I may have missed in the above?

Greatly appreciate all your help in advance!!

 

What is 'indexed shares'?

 

Tax advice on the limits of a corporate beneficiary based on Part IVA anti-avoidance rules would be wise. The very reason you seek to do this for a tax benefit. It should have been considered at the time the trust was implemented. However where there is a suitable defence that the company beneficiary will be used as a investment vehicle itself then that may be OK.

Assuming index ETFs are acquired franking is a consideration and there may be merits to a company as investor above that of a trust. Maybe.

 

The main advantage for trust b to have a special purpose company is to prove the trust relationship down the track if stuff is lost.

Get advice regarding different share classes while remembering the ordinary shares of your bucket company are already owned by a discretionary trust.

if you want to invest in the trust and do Div 7a loans to your bucket company just remember the loans need to be repaid. Do a discounted cash flow to understand the benefits before you decide.

A lot of people (not all) are choosing to invest directly in the bucket company.

Avoid trust b sending profits to trust a and then back to the bucket company.

Consider the impact of foreign tax credits in a bucket company as well.

 

That is something you need specific legal advice on. It is not needed though

yes so you can get some of the dividends into a deceased estate/testamentary discretionary trust.

Lots invest in the bucket company

Yes, but probably shouldn't

Yes lots.

Using a bucket company will delay the paying off of the non-deductible debt, but the tax savings might make up for it.

 

I have a similar structure and have just completed a review and implementation process with a estate planning lawyer and an accountant.

I will share my thoughts and what I have done. Then take that and get some independent advice to ensure it suits your needs.

I have trust A with a company as a beneficiary. The company then has trust B as the share holder of said company. The company holds its own investments and has done some lending back to trust A. I am now winding up the lending between company and trust A as its becoming a nuance to manage. Simple at the start when the numbers are small. After a few years and as the numbers grow it becomes a pain to manage. And since the plan is to hold long term / permanently to pass onto children, using the company as investment vehicle comes with it own set of benefits.

A key benefit of the company holding is the ability to leave the shares of that company as part of your estate which can then form a testamentary trust as part of your will. That’s exactly what I have just done.

How this works from my understanding. When you assign the shares of the bucket company make sure you assign them to trust B, but also have yourself and your other half as shareholders. From what I understand you can have different classes of shareholders in which you don’t necessarily need to distribute dividends to evenly. While you are around you may distribute from the company to the shareholder trust B and not to your self as the individual share holder.

If and when you pass and your individual share holding goes into the testamentary trust as set up in your will, you may then elect to distribute from the company to the testamentary trust shareholding.

If you don’t know what and how a testamentary trust works, look it up. If your planning on passing assets to children then I believe it should be part of your plan. There are a number of things you need to watch out for with this structure and how it interacts with the testamentary trust once it comes into existence to ensure you don’t loose the distribution to minors benefit, but thats another thing all together.

As you can see, such as structure can become a complicated beast. I should know since I have created my own monstrosity of a structure that I am now trying to ensure is manageable if I am no longer around to manage it.

I’m sure the experts on this forum will go through what I just said and pull up any errors. Keep in mind I’m not an accountant or lawyer so this is my simple understanding of how such structures work but I have used professionals to put it together for me and it didn’t come cheap.

 

How do the ordinary shares in the bucket company form part of your estate if they are owned by trust B?

 

Thanks for your comments Paul! I wasn't able to figure out why investing thru bucket co was better than the trust. Reason being all dividends from ETFs flow back to bucket company (thru the annual trust distribution) in the accumulation phase. In the drawdown phase (retirement) sale of the ETFs means you manage CGT at a pensioner's tax rate which is more advantageous than the bucket company.

 

Many thanks Ross, your feedback is actually really helpful - particularly re the share classes.

Just to clarify this comment is regarding the corporate trustee for Trust B?

From the rough nos. I calculated they seem to work out (assuming) the Div 7A loan interest will be treated as income for the company so the only "leakage" is the 30% tax that will be payable. Based on current Div 7A interest rate (4.52%) that's an effective interest rate of 1.36% to invest - far cheaper than any margin lending out there!

Is this purely to avoid unnecessary complexity?

The intention is to keep Trust B largely dormant until drawdown in retirement i.e. have bucket company declare dividends to Trust B and have it pass to family members.

 

Thanks Terry (and also for all your tips which is the only reason any of this stuff makes half as much sense as it does)! Is there an alternative way that you would suggest apart from investing directly thru the bucket company - as in my comment to Paul above the lack of CGT discount with the company convinced me perhaps that the trust structure is preferable.

Any clues where I could start looking into haha?

Thanks to some of your previous advice one of the reasons the PPoR hasn't been paid off is we're currently using it to debt recycle some of our existing investments.

 

Firstly WOW and secondly THANK YOU so so much for taking the time to write all of that out in such detail. Definitely helps a lot hearing about someone else's experience in having all of this set up. I have absolutely no clue about wills and testamentary trust (we are early 30s and no dependents yet!) but as you rightly point out if bequest is a goal then something for us to think about before we put anything in place.

 

No problem at all.

Few other things. I would always have a corporate trustee over an individual trustee. Gives you much more flexibility in the future. Don’t really see any benefit of individual over corporate.

Spent some time pondering the whole loss of capital gain discount in a company holding over a trust. Why not have both. It really depends on portfolio size and long term plan.

My plan is assets held in the company will be a intergenerational holding to hopefully never be sold down but a source of income for the family. No need to ever sell, so no concern for capital gains.

A second holding via a trust setup can be the vehicle of choice for holding investments that if a need or want arises can be sold down as desired with the capital gain discount available.

 

If distributing to a company the other options are
a) pay out the money as a dividend
b) have the company lend it to a related trust or individual to invest, which will mean Div7A
c) have the company itself invest
d) have the company lend to another company to invest, no Div7A

Don't forget the company doesn't get a 50% CGT discount but the final CGT could still be nil
Tax Tip 295: Company Paid Tax is not the final Tax paid on its Income Tax Tip 295: Company Paid Tax is not the final Tax paid on its Income
Tax Tip 287: How Capital Gains Through a Company can be Tax Free Tax Tip 287: How Capital Gains Through a Company can be Tax Free
Tax Tip 288: How you could end up paying 47% in CGT Through a Company Tax Tip 288: How you could end up paying 47% in CGT Through a Company

my posts for starters. I have written over 23 tips on bucket companies alone

 

that is generally how I advised a client today on that set up. Companies can be much simpler than trusts and are often overlooked as investment structures.
Also people assume there should be one structure to hold things, but you will potentially need multiple structures for different things.

 

Yea that’s what I was thinking too.

So I had a look at Terry's ‘CGT can be nil with companies tip’ and it seems it’s preferred to use the company to resolve CGT over a trust because the trust has to resolve the CGT the same year it’s incurred whereas the company can drip feed the franking credits over multiple periods. This is particularly meaningful if it’s a large capital gain and there’s not enough beneficiaries to maximise the tax free thresholds?

Is the answer that companies owning assets offer poorer asset protection than trusts (?)

 

Incorrect. Sometimes a trust is benefical and othertimes a company may. Advice would ensure this and other options are all considered.

Incorrect as such. The trust BENEFICIARY will pay tax on the capital gain. The company wil pay tax on the gain. Both are tax events in that same tax period. For a trust, assuming it can be discounted the top marginal rate through a trust may be not more than (50% x 45%)+2% = 24.5% vs a company rate at 30%. One benefit of the company however if the franking credits may be accumulated from that point and if structures correctly the company may be able to pay future year divs which have a refund of the franking credits. If the company had other income sources or a tax loss it may even be able to neg gear the CGT amount and even lower the tax rate to as little as 25% perhaps. Thus the net tax over time may be far less than 30%.
The downside to a company is dvidends must only be paid to shareholders in a proportionate manner and some franking rules can affect that. Where a trust may have flexibility in how much can be distributed and to whom.

No. The company beneficiary MAY be better or worse asset protection. The balance sheet of the trust and the company and the maner of distrributions etc may all be exposed to creditors and its a element of any structure a solicitor should advise on. A entity isnt "asset protected" as such. It may help but is no shield. Most people dont understand what asset protection even means. I hear people think a trust can prevent a tenant claim for injury on premises for example. It wont help. However property insurance will help. And if its a trust with a human trustee its even possible the trustee is personally exposed

 

But really in the instance that the shares for the company are held in a trust you retain the same flexibility for distribution of dividends and associated franking credits as you would if the assets were directly held by a trust which has the same beneficiaries. Or is my understanding flawed?

 

Except a company doesnt get the 50% cg discount.

 

Shares of a company as property available to creditors if the shareholder becomes bankrupt.

 

If the asset was held by the trustee of a discretionary trust you would still have most of the benefits of the company but have a choice of whether to get the 50% CGT discount at the point of the sale of a capital asset or distribute that capital gain to a bucket company