Legal Tip 207: Bucket Companies and Death

This is a more detailed version of a previous post first written in May 2016:

Legal Tip 131: Legal Tip: Estate Planning Implications of Bucket Companies

Legal Tip 131: Legal Tip: Estate Planning Implications of Bucket Companies



One strategy involves diverting company or trust income to a non-trading company. Often called a Bucket company. The idea is to cap the tax rate at 30% and reinvest more capital so that it can compound later.

The plan is to then draw down on the accumulated income in retirement when your income is lower, and you won’t be taxed as much.

Planning for death is needed though as often the company will still have significant capital at the point of death.

Company assets cannot be left in a person’s will:

Legal Tip 186: Death and Wills with Assets Held in a Company Legal Tip 186: Death and Wills with Assets Held in a Company



If you own shares in a bucket company these shares can be left in your will. However, consider control of the company where you plan to leave the shares to multiple people.



Example

Homer dies and he is the director and shareholder of SimpBucket Pty Ltd which has retained earnings of $700,000.

Homer leaves his shares in the company to his 3 kids in equal shares.

Since any 2 kids will have a majority, they could gang up on the third kid. For example Maggie and Lisa could take control of the directorship by using their majority voting power to oust their brother Bart. They could then cause the company to pay a dividend or not pay a dividend without consulting Bart.

This may inconvenience Bart – he might have been planning to quickly buy a new house with his ‘share’ of the $700k (or $1mil grossed up), but now he won’t get his hands on it for years potentially.


Generally, however, the shares of a bucket company would be held by the trustee of a discretionary trust. This would mean the shares would not pass via will. The controller of the trust would need to carefully consider who to pass control of the trust too and how.

A discretionary trust controlled by more than 1 person is generally not recommended. If it is the only option, careful planning is needed. Some strategies for this I have outlined at

Legal Tip 199: 8 strategies for ‘passing on’ a discretionary trust to multiple people Legal Tip 199: 8 strategies for ‘passing on’ a discretionary trust to multiple people



Also, the Bucket company generally does not invest itself. Generally, it would lend money to a related trust which invests. The control of this trust needs to be considered as would the terms of the loan agreement – could it be called in for example. Generally, not an issue where the same person controls the trust and the bucket company, but it could be an issue when control is different.

 

One danger on death with D7A loans which can arise when the term bucket company is used can be debt forgiveness through inaction or specific actions. the indebtedness should be an element of the deceased estate, probate application etc. Its sometimes a issue we refer back the the executors to raise with legal advisers where its overlooked initially.

 

1. How do we make sure that the bucket company is taxed at 26% rate (in 2020-2021) rather than at 30% rate? One way I can think of is ----- make sure that the bucket company earns at least 20% of the income from non-passive source. But it may not be possible for the people, who are living on dividend/interest. Is there any other way?

2. In some cases I have observed that suppliers or service providers do not want to do any business with an organization that is structured as a trust -- they are quite strict about it. They want to deal with the business that is structures as a company. If we want to accommodate this case, where will this trading company fit in the grand schema of "trading trust"-"bucket company"-"distribution trust" that has been implied in this thread?

 

1. You would need to make sure the company is a 'base rate entity'

2. that is something you will need specific legal advice on relevant to your situation. The bucket company could in fact be instead a holding company - but there are legal issues to consider.

 

I have never heard of a entity who wont deal arms length with a trust that has a corporate trustee. However in cases where the trust lacks a workers comp and insurance they might. I worked in civil construction and we adopted a strict rule for subcontract trustees that we refused to deal with a human trustee at all and required the trust to posses workers comp and a suitable public liability policy.

In cases where personal services income is involved I have seen "employers" or labour hire agencies etc look at a company contractor. They do this to avoid being a tax scheme participant and breach of the fair Work Act. That may exclude any bucket company (PSI) use anyway.