Legal Tip 151: Structuring the Ownership of Shares

I haven't seen or heard of that book before.

Kids are taxed at penalty rates of up to 66% so you would not want them to hold the shares or for a parent to hold the shares as trustee for the kids.

The best bet maybe a discretionary trust and pass the control to the kids when appropriate.25 years of age perhaps. Or keep control and pass dividend once they reach 18.

One trust per kid perhaps.

 

Found this on Somersoft from Brenda Irwin

However I did open bank accounts for them (the ones which actually pay some interest) and they can logon and find their own account balances and watch the little they have grow.

I have also got tax file numbers for them.

I have also opened trading accounts for them with a sharebroker with my hubby and I as trustees.

That followed on to my children having Chess accounts.

Now we are all set, but $500 each isn't going to buy much yet.

What I really got out of the book was the hold your hand sort of way it explained different shares and how to go about buying them, and how they can grow in time.

I also found out from the ato, that even though my kids wouldn't earn enough in share dividends to even pay tax, and they certainly don't earn any wages yet to pay tax, they could if they owned franked shares claim the franking credits every year in a special way and receive a refund.

 

The tax rate for kids is 66% for income above $416 pa, so it probably wouldn't be best to hold any shares for them, even fully franked, as they would quickly exceed the income threshold.

 

Hi Terry how about if from Grandparents, Christmas, a Paper round or a Loan?

Money

If your child deposits their own birthday and Christmas money into the account, the tax office considers that the interest earned is in your child’s own name – even if you are the signatory to the account.

Also any thoughts on

The 66% tax rate applies for income from $417 - $1,307, then above that is taxed at the top marginal tax rate (45%). The 66% tax rate just makes up for the first $416 tax free, so essentially once it goes over $1,307 you've effectively paid tax at 45% on the full income

Or

How to Buy Shares for a Child

AFIC also has a guide INVESTING FOR CHILDREN

 

My children were fortunate my father considered them in his Will and bequeathed them a portion of his estate. It was however a really badly drafted Will - no Testamentary Trust aspects - and left the money directly to them.

As the executor I plonked the money in LIC's with me as the authorised trustee since they were minors but they were taxed at adult rates which I found bemusing for children under the age of ten. The funds were vested when they each turned 18.

A couple have kept going at it, continue to invest and build on those funds. One didn't and now is an unhappy person "It's so unfair." Cannot help your choice dear child.

Still, all get funds from their Mum's estate which is administered, no longer by me thank goodness, under Testamentary Trust arrangements. A little bit of thought can go a long way to assist your beneficiares I feel.

 

The trouble with a bare trust (like parent holding title for children as beneficiaries) is that the children can demand transfer of title on their 18th birthday. This is the case with simple testamentary trusts in wills too.

If a decent sum of money 18 is possibly too young an age to have access it it.

This is not the case for discretionary trust, including a testamentary discretionary trust set up under a will.

 

Hi Redwing

The tax rate does drop down again, but even 45% is too high considering an adult has to earn over $180k before they pay this rate.
It doesn't matter if the money is from grandparents or a loan, but if the income is from work they can be taxed as adults.
The exception is income from a will or deceased estate because of s102AG of the ITAA36.

 

Hehe, I know what I would have done with $75k when I was 18.

Yes, I figured it was best to consult a firm which was well versed in the matters associated with discretionary testamentary trusts. Took quite a few iterations. Pricey but I didn't consider it was prudent to stint especially where considerable assets are involved.

 

Thanks Terry, could you suggest a lawyer?

 

lol

 

See also
Legal Tip 196: Strategy: Personally Owning the Shares of a Bucket Company

 

Terry, I've got a few questions
1. Assuming the trustee is a corporate trustee, with you as the shareholder. If you get sued, won't the creditors take over your share, become trustee and then control the trust?

2. Same as question 1, but now on the bucket company.

3. If you accumulate funds in the bucket company, is it possible to lend the funds back to the trust to invest? Or would you invest under the bucket company's name? If investing under the bucket company's name, wouldn't you miss out on CGT discounts?

4. As an appointor, are you at risk if you're being sued? What if you died, can the wife be made appointor?

5. What would you say is the recommended amount of investments/income needed to make it worthwhile to set up a trust to invest. Assuming currently minimal risk requiring asset protection. Is it worth setting up now and run it at a loss initially or invest individually then sell shares (with CGT) and rebuy next time under the trust.

6. How much do you charge to set up a trust?

 

1. the appointor would change the trustee well before that
2. You might not want to own the shares in the bucket company
3. yes, can lend back to the trust under certain conditions
4. yes, appointorship is not property that can pass to the trustee in bankruptcy
you might be able to make someone's wife the next appointor, even your own. depends on the working of the trust
5. $1 potentially. It depends. shares are easily transferred unlike property so you can readily change structures.
6. $1100 generally.

 

Thanks, so the appointor position is quite safe from any third parties control, is that right?
Did you mean $1 or $1m?
If you were to use the trust in a debt recycling strategy, does it negate the benefits of using the trust? Since you'd need to distribute all the income to repay the non-deductible debt (ie. no point accumulating in the bucket company)
$1100 for a basic DT? or a DT with corp trustee & bucket company?

 

Have a read of my legal tips I have covered all those. $1100 is for a trust set up

 

Trusts to own shares with bucket companies to receive the dividends can be very complex and difficult to run with Div7A and other issues.

Another way to hold shares is via a company structure - it the shareholder of the company being a discretionary trust.
see
Legal Tip 288: Structuring the Ownership of Shares in a Company Legal Tip 288: Structuring the Ownership of Shares in a Company

 

excellent post @Terry_w @Paul@PFI , Thanks for sharing your knowledge.

I am in a similar situation and have started investing in shares. As of now I am just starting with 10k-20k so my summary is that for such a small amount it may not make much sense to setup a trust. Great post

 

Have a read of Legal Tip 288 too. Companies can be good for those on high income investing small amounts as they are less complex than trusts

 

- Franking accounts add complexity to companies
- Companies wont get ETF, and managed fund income distributions in the charecter received eg Discounted capital gain income is not discounted and fully taxed.
+ Companies that receive franked income may be fully tax-paid as the franking will offset some / all of the tax due. BUT,....No refund.
- Trusts can distribute franked income to lower income beneficiaries for a full refund of tax credits
+ Trusts are often compelled to distribute to avoid 47% tax and add complexity and cost
- Many peope dont understand trusts and are led by advisers