confused......what are the tax benefits of trust (for passing down to 1 child)

I think I'm confused about trust and it's tax benefits for passing money down to future generations?? I understand if you have a lot of adults who are not having income and you can pass the profits from the trust (tax free) because of the combination of all their tax free thresdhold.

how about passing it down for 1 child (adult)?



【Direct 1】
Parent gives money to Child (adult age); 0% tax

【Trust 1】
Parent puts money in trust bank account
Trust gives money to Child (adult age); tax depends on Child income for the year - if the Child has a PAYG salary, money from trust could be taxed from 30% onwards



【Direct 2】
Parent invest in Vanguard
Parents sell some Vanguard; and pays tax or not (pension) on it
Parent gives money to Child (adult age); 0% tax for the child

【Trust 2】
Parent puts money in trust bank account
Trust invest in Vanguard
Trust sells some Vanguard for money (where does the CGT gets deducted?)
Trust gives money to Child (adult age); tax depends on Child income for the year - if the Child has a PAYG salary, money from trust could be taxed from 30% onwards

 

simplified;
I want to leave some money for my child. If I were to give it directly, there would be no tax for the child.

If I want asset protection for the money for the child, the child need to pay "tax" to receive it?

I think there's something fundamental that I am not understanding about trust.

 

There are different types of trusts.

A testamentary trust, for example, is a totally different beast. But get professional legal advice.

Small downside: someone has to die.

 

thanks, I can google all about the different types of trust, but I couldn't really find out or confirm the tax consequences for the child (adult).

 

Lawyers need to make money too.

 

Trust income.


are you saying they can modified the trust details so that the child is able to get the "gifts" from the trust without tax?

I need to check out more.

 

You should get proper legal advice. pros and cons depend on your circumstances.

Consider grandkids, for example?

 

I think you are confusing income and capital?
A trust must distribute income which is then taxed in hands of recipient.
Capital can be transferred without triggering CGT if it is not a CGT asset, such as cash

 

Thanks Terry for clarifying. Yes, I'm confused about capital and income.

So capital (cash) can be stored and withdraw from trust to child without CGT and tax incurring by the receiving child (adult).


(1)
How about this scenario?
I put 100k into a trust
Trust invest in vanguard index
2 years later, it's 200k

Is it possible to withdraw only capital $100k from the assets? I think it's not possible? not sure if there are some structures for this?


(2)
Trust received 100k as capital
The capital is put into a bank account
My personal mortgage is offset by the amount that is in the trust bank account.

Withdraw 50k capital to give to child (adult) - no tax.

Is this possible?

 

Yes, but will the trust have $100k cash to pay it? Not if it is tied up in assets.

I have no idea what this means

You cannot put capital into a bank account so it must be in the form of cash.

How would your personal loan be offset with trust money? To do that you must have borrowed it from the trust, or perhaps just taken it and mixed trust assets and personal assets.

Where is the $50k cash coming from to give to the child?

 

Apologies,
going with the scenario that cash is treated as capital and distributing capital incurs no tax for the child (adult).


1) I put 100k into the trust bank account as cash - this is treated as capital
2) I have a personal home mortgage loan
3) Am I able to link the personal home mortgage loan to the Trust's bank account that has 100k? to offset the interest? (via a interest-free loan of $100k from the trust to my personal bank offset accout)
4) return the loan of $100k from my personal bank offset account to the trust
5) child withdraws $50k from the trust - is this free of tax for the child?

 

Are you the trustee?
perhaps you can borrow from the trust interest free, but generally would be a breach of trust if no specificallly allowed by the deed.

5) The trustee could distribute $50k capital to the child if they are permitted under the deed. It would generally be tax free.

Why the extra step? Trustee

 

Was thinking of setting up a corporate trustee for a company or someone to manage to trust funds for the child (adult).

And only certain conditions can the child get money from the funds (education, medical, tours, etc) and will be free to withdraw whatever the child wants after 35.

Before 35, if the child wants money that is listed under the conditions of withdraw, the child can talked directly to the corporate trustee (third party - is there such a service).

If child needs it for something else that is not listed under the conditions of withdraw, need to talk to me for me to authorise the withdraw.

Or am I making it too complicated?

 

That is possible. But it would be costly to appoint a professional trustee to manage this. The trust income, if any, would generally need to go out somewhere, but you could set it up to have separate class of beneficiaries for capital and income.

 

Perhaps.
- Costly. eg perpetual trustees, AET etc. A licensed trustee company offers such services. They will have specific limits and can make decisions contrary to your original views in some cases.
- If you die who controls that power ? Succession ?
- Why age 35 ? Why not 34 or 36 ? What occurs if they get to age 34 and marry someone you detest and dont trust ? A vesting date at age 35 may not offer great asset protection.

This sounds pretty much like a "discretionary power" and is common to a disc trust. Beneficiaries cant ask and the trustee has power to decline. Also may allow their family to benefit eg income shared with wife. Trust income may need to be distributed to beneficiary to avoid 45% tax. In that act they become entitled and can request their entitlement and you cant likely limit it. There are (more costly) work arounds however.

Seek legal advice. In a practical sense allowing the adult child to ask for $$$ in your lifetime is not different ? And then leave any benefit as part of a will as a testamentary benefit ?

 

Yes, I'm brain storming and trying to see what is possible.

Thinking of doing 1 of each of this trust for each child? A corporate trustee and handles all the trust for the children.

If I pass away, they would need to wait until they are 35 for them to control the trust themselves. They could then demolish the trust or continue as it is for their asset protection; taking bits out when they need it, invest in a total new asset class. Or simply cash sitting in a bank.

 

Would 1 million invested in vanguard in the trust offsets the cost of hiring the corporate trustee?

Or I could set up the trust with a bucket company if tax deemed to be too expensive to do direct to the recipient?

The reason for thinking about using separate trust for children is that, I will be able to say I am fair and each child starts with 1 million in the trust and how much it's left in the end depend on their usage patterns?

 

Your view of control is very confusing. ‘Their usage patterns’ assumes they have control, but you are talking about not giving them control.

this is separate to whether you should have separate trusts or a bucket company.

Or you could just keep everything in your name and distribute via your will.

 

There's a list of conditions that they are allow to have access, before they are 35.

 

And that doesnt make sense. You could control everything yourself until they are 35, then just give them control. Then the ‘conditions’ are up to you and you dont need a third party involved.

What if I die, you say? Then look onto testamentary trusts. Before death, of course.