Legal Tip 151: Structuring the Ownership of Shares

Quick summary - a discretionary trust is a great way to hold shares.


An ideal way to own shares would be via a discretionary trust. The main reasons being

• a) Asset protection against creditors of the beneficiary, and

• b) Tax savings

A discretionary trust will generally give good asset protection on any growth in value of the shares. Any loan giving to the trustee will be an asset of the lender so no asset protection if the lender were to become bankrupt. A gift will give good asset protection if the giftor later went bankrupt, but the gift could be clawed back in the first 5 years and possibly later if the gift was to defeat creditors.

Tax savings can be achieved by the trustee distributing income to a wide range of potential beneficiaries – including companies.

The trust should probably be ....

The rest can be found at investchat Structuring the Ownership of Shares

 

Totally agree with the benefits, and have been researching around this myself recently.

There is one topic in this I hope somebody could give a "Plain English" explanation to - Google is a confusing friend on this point - being the treatment of franking credits attached to shares held in trust.

As it's a property investment forum, let's assume there is also some real property held in trust. Let's further suppose that the property side is negatively geared as would be the case for a good proportion of situations.

What happens to the franking credits if there is no income even after dividends have been received?
Are they effectively lost, and if so does it make more sense to get the properties at least neutrally geared perhaps by reducing debt, before venturing into the world of dividend paying shares?

 

The trust must have at least $1 of income or the franking credits are lost. This another reason not to have shares in the same trust as property

 

It doesn't get more "Plain English" than that, thanks Terry.

 

@Terry_w - what is the cost to setup & maintain a discretionary trust? ( Apologies if this has been answered before )

Thanks.

 

I charge $1650 including 2 hours legal advice.

Cost to run - $0 to much depending. Mainly just accountant fees

 

My accountant said fees are about 700 a year. That surely eats into the profits per year.

 

Yes it would - but how much extra would he charge if you held shares in your own name?

 

I Didn't ask, was a very quick phone call convo as day was ending. He Advised to leave it in my personal name to keep costs down.
Would it be a similar charge as holding property? I get charged around 120 per property held.

Need to call him back and ask

 

He advised you on this in a couple of minutes? Or he gave an off the cuff comment?

 

My phone log says 6 minutes. In 6 minutes we discussed my current scenario, my current property portfolio, my earnings, my wife's earnings, what our short term future would be, told him I wanted to purchase 100k in shares now and add to it monthly/yearly, trust and cost of set up, should I buy in trust, buy in wife's name or mine.

He Said your gonna spend 700 a year or so for accounting fees plus start up costs. Advised it's cheaper to keep in my personal name to keep costs down, and best in my name vs wife's as I'm indicating a lower earnings to pay less tax.

Didn't speak about the weather or anything exciting

 

I take 2 hours to advise on something like this.

 

What else would you talk about for the other hour 54?

 

the future
what ifs
strategies
how a trust works
how to structure a trust
structuring the borrowings
income tax
CGT
debt recycling etc

You can't say you got advice on structuring the ownership of shares in just 6 minutes - it is just too short.

 

In many cases a trust isnt a great idea and others it is. I would generally advise anyone thinking of trust vs personal to weigh it up as follows:

Personal
- Fixed share of income and cap gains
- Minor additional compliance (tax) cost say $50a year. Zero upfront
- Estate panning easy. Its covered by existing will if there is one.
- Investments are at risk to creditors etc
- Margin lending > Easy
- Losses may offset other income
- Often sole choice for employee shares


Trust
- Discretionary available but limited to adults - Often only two. No value if one.
- Margin lending > difficult
- Upfront $1500 + $500 duty, Ongoing allow $250 ASIC + $750-$1100pa for tax an financial reporting (MUST DO)
- Estate planning issues re control
- Investments asset protected (perhaps). Did individual lend trustee $ ? Then none perhaps.
- Losses quarantined
- Complex re employee shares and vesting limits etc

Personally if someone was having a flutter with shares a DT isnt the first choice. Maybe when a definitive plan of magnitude etc occurs. I see some who think they will make a killing to lose their pants. The trust an expensive folly.

 

Good points Paul. But some inaccuries or vagueness.

"Discretionary available but limited to adults - Often only two. No value if one." - You probably mean in practice there are really only 2 beneficiaries that will receive any benefit from the trust - spouses. But don't forget bucket companies as I mentioned above. Even where there is no spouse an individual paying more than 30% in tax could cause the trust to distribute to a company. What about children? They could earn a pidly amount each year - $416 tax free threshold, but they grow up and become 18 one day. Someone may have no children now, but that can change.

"Upfront $1500 + $500 duty, Ongoing allow $250 ASIC + $750-$1100pa for tax an financial reporting (MUST DO)"
$500 duty only applies for trusts settled in NSW. It is $200 in Vic and $0 in most other states.

Ongoing ASIC fee is only where there is a company involved - whether as trustee or bucket company. Accounting fees will vary.

"- Margin lending > difficult"
Not really difficult. The only difference between an individual applying for finance and a trustee is the supply of the trust deed.

- Investments asset protected (perhaps). Did individual lend trustee $ ? Then none perhaps.
In most cases there will be good asset protection on the growth in value of the shares. Where money is loan that money always belongs to the lender so if the lender becomes bankrupt the creditors will get at that money. But any capital growth belongs to the 'trust'.


"Personally if someone was having a flutter with shares a DT isnt the first choice."

I agree with this!

 

Apart from some asset protection, I can't see the value in a trust over personal names right now.
Those costs per year are high, and shares can easily be placed in individual names as you choose.
If you have a kid, you have to wait 18 years before you can distribute large amounts from the trust to help reduce taxes. The costs over the 18years which could have also compounded.
Maybe at a later stage if I place a large amount of say a million+ From a sale of a house it can help, but for now over the next few years I can't seeing it help my scenario

 

How about just using a company to own shares and use it as an internal compounder until you are ready to distribute income (when you retire)?

What are the drawbacks here? Is it seen at tax avoidance?

 

Lets say you have $100,000 worth of shares paying 6% dividends.
That is $6,000 per year in income. (ignoring franking credits)

If you are on say $100,000 in income you would normally pay $26,632 in tax.

Owning the shares in your name your income would be $106,000 and you would pay $28,972
that is more than $2,340 in extra tax.

Now lets assume you are an orphan that's had a vascetomy. There are no immediate beneficiaries other than yourself if you were to set up a discretionary trust. You could distribute to a bucket company which would pay 30% tax or $1,800 in tax - just $540 less than you. These savings themselves are not enough to justify the added expense.

But say after 10 years of distributing the $6,000 income to the trust you decide to take a year off work - perhaps due to an operation to reverse that vasectomy going wrong. You could cause the company to pay out retained earnings, including any franked dividends, and you may not pay any tax - in fact you could get back more tax that the company had previously paid in the past.

Now lets say you do get married - you have a new beneficiary. perhaps he or she is not working, so the $6,000 in dividends can now be distributed to them with no tax paid and franking credits resulting in tax back that the companies paying the dividends had paid.

Lets assume you sell some shares that have trippled in value. You could cause the trust to sell shares with $80,000 worth of capital gains per year - $40,000 after the 50% discount and distribute $20,000 of this to each of you during your 2 years off work while sitting in a North Korean prision -arrested for talking about franked dividends to school children in Pyongyang.

This flexibility makes a trust well worth considering.

 

Structuring the Ownership of Shares @Terry_w