Legal Tip 136: How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust

How to Set Up a Bucket Company as Beneficiary of an Existing Discretionary Trust

A bucket company is a company set up solely to receive income from a discretionary trust. It should never trade or do anything such as own property as its sole purpose is the collecting of funds – in order to cap the tax rate at 30%.


Steps in setting one up

1. Read the trust deed
Read the trust deed and see if a newly formed company would qualify as a beneficiary.
If the answer is it wouldn’t then you cannot set up a bucket company without having the deed amended.

2. If a new company qualifies then how does it qualify?
The wording of the deed may require a primary beneficiary to be the director of this company and/or to hold shares. When setting up the company you have to make sure the company qualifies as a beneficiary – otherwise it cannot receive income.

3. Consider the structure of the company
The bucket company could end up holding hundreds of thousands of dollars so great care should be taken when setting it up especially with the control and asset protection aspects. Should the shares be owned by the trustee of discretionary trust? Probably as if an individual where to own the shares could fall into the hands of creditors if that individual where to become bankrupt. But also for tax reasons as this will allow the bucket company to pay dividends to the trust and out to a wide range of beneficiaries.

4. When to set up a Bucket company?
It is important to get the order right. First the shareholder of the bucket company needs to be set up. To hold shares the entity has to exist before the shares come into existence.

However, the bucket company doesn’t, usually, need to exist before the trust it is a beneficiary of. The trust could be set up now, and the bucket company in 10 years for example.

5. Using it
Once it is all set up it is ready for use. But before you use it make sure you seek tax advice on whether it is appropriate for that particular year and what the tax consequences will be for the income distributed.


Don’t do this without legal advice and don’t start causing a trust to distribute to a company without tax advice.

 

6. Make Sure the Bucket Company is not an Excluded Beneficiary of the Trust

Since the above post was written stamp duty and land tax laws in many states have been changed so that 'foreign persons' are taxed at higher rates, as a result many trust deeds have been amended to exclude 'foreign persons' as beneficiaries. Many if not most of these exclusions would meant that a bucket company with its share held by a discretionary trust would be a foreign person - unless that trust excludes foreign persons as well.

Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion

 

@Terry_w - When the trustee is not a beneficiary of the trust (beneficiaries are nominated real persons not the typical wider children, grandchildren, great grandchildren, in-laws, neighbour's goat etc) could the trustee be used sad a bucket company without amendment of the trust deed?

 

Not sure what you are asking Scott No Mates.

Are you asking if the trustee of the trust that distributes income to the bucket company can be the trustee of the shares of the bucket company - owner of the shares?

If so yes that is possible. Whether it is a good idea or not is a different question

 

Homer established a TDT upon his demise which has a corporate trustee (Simpson Family Trust Pty Ltd) but the beneficiaries are Bart, Lisa & Maggie (not extended beyond these 3 people).

If Bart isn't in position to accept a distribution from the trust, can the trust distribute his share of income to the Simpson Family Trust Pty Ltd for it to pay out to Bart at a later date?

Company pays tax at corporate rate & distributes as dividends.

 

No because from what you have written the trust would not be a beneficiary. But if the will was worded so that any company in which the 3 names beneficiaries held shares then the company would be a beneficiary and it could pay itself in its personal capacity. As long as no other clause in the will excluded it.
But would it be a good idea? Prob not
who owns the shares in that company?

 

Bart, Lisa & Maggie

 

when a company makes a dividend payable it has to go to all shareholders in proportion to their ownership of the shares - assuming just ordinary shares on issue. That would mean Bart would get 1/3 of his trust distribution in the end, assuming they are all equal shareholders.

 

In that case distribute the lot to the company then the shareholders?

 

if the shareholders of the company are anyone other than Bart then Bart is missing out in the end.

 

The company may also be liquidated.

 

Could different share classes be used?

 

Yes, or another trustee shareholder