Legal Tip 190: Setting Up a Trust When You Have No Family

Discussion in 'Legal Issues' started by Terry_w, 25th Jan, 2019.

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  1. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    What is the point, you might ask, in setting up a discretionary trust to hold investment assets when you have no family?

    A discretionary trust needs at least one beneficiary with the trustee having the option to retain income, or at least 2 beneficiaries where it doesn’t. However, most discretionary trusts will have hundreds of potential beneficiaries as they will be set up with one or two named persons as the primary beneficiary and then there will be secondary and, possibly, tertiary beneficiaries who are relations of the primary beneficiary.

    So even though you are on your own now, you might have cousins or distant relatives who could be beneficiaries – this doesn’t mean they need to be recipients of trust income, but just that they could be. You never know when one of your cousins might invest in shares and lose the money and have carried forward income or capital losses.

    There is also the issue that even though you may not have any family now, you may get a spouse at a future date. There may even be children and then grandchildren. All these people could and probably would be beneficiaries of the trust. This is generally the case even if they do not ‘exist’ at the time the trust was created.


    Perhaps most importantly, a company could also be a beneficiary of the trust. This may allow for use of the bucket company strategy of diverting income to the company to cap the tax rate at 30%. Later on, the retained earnings in the company could be distributed to future family members (providing the shares of the bucket company are held by a different trust).


    There are also the asset protection aspects to consider. Not having a spouse may mean holding all assets yourself and taking a risk of not ending up bankrupt. Where the assets are held on trust, the assets are generally much safer from attack should the controller of the trust become bankrupt at some point.
     
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  2. Trainee

    Trainee Well-Known Member

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    Can a family trust be set up with a named beneficiary that is unknown at the time? (future spouse say).
     
  3. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    A reference point is needed so at least one person will need to be named - future spouse of X sort of thing.
     
  4. Jello

    Jello New Member

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    Terry,

    In regard to asset protection during separation / divorce....

    It was explained to me that:
    1) The Family Court looks at where the Trust distributions go and what the income is used for when considering marital assets
    2) If both myself and spouse receive distributions and then separate, we are both entitled to Trust distributions after the separation
    3) Loosely said: "There is no way of keeping the Trust out of divorce proceedings, you are at the whim of the Family Court"
    I understand how this could be the case, and I am okay with this. However, my concern is if we get new spouses.
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    My partner and I are named beneficiaries of a discretionary trust (Master Trust). If we separate and get new spouses:
    a) Will the new spouses automatically be considered eligible beneficiaries of the Master Trust?
    b) Is it wise not to distribute to the new spouses directly from the Master Trust in case of a second divorce?
    3) Is it better to create a separate trust to receive my distributions and name the new spouse as a beneficiary in the second trust?

    I am concerned that if we get new spouses and distribute to them from the Master Trust, and if that relationship fails, could the new spouse make a claim on the Master Trust wealth? I would like to protect the Master Trust from such scenario.

    Same question applies for children's future spouses.

    Thanks,
    Jello
     
  5. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    3. Not correct. Many cases show.

    A. Depends on the terms of the trust deed.
    B. Depends. Perhaps from a family law perspective.
    3. That is a strategy often used.

    Seek specialist legal advice
     
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  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    A family trust with $100 of assets also helps a taxpayer access a 4 year amendment period.There is no requirement that the trust has made an actual distribution either !! This could be a great thing if you wanted to claim a deduction years later or correct a error. Your brothers trust could assist this. But it works both ways. You may also be obliged to amend and add income adjustments outside the two year period.

    I have often encountered people who can use this rule when they find a error in prior returns.