Legal Tip 217: Fixing a Bucket Company Structuring Mistake

Some people set up bucket companies where the shares of the company are held by themselves personally not as trustee. This makes it very difficult to distribute income retained in the company tax effectively to children. It might be considered a structuring mistake – but there are reasons why it might be considered good planning too.

See

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

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


So, what could you do to fix the issue if you do regret the decision? Transferring the shares of the company to a trust will result in CGT so it might not be worth doing. But there are other ways perhaps.


Example

Bart is a high-flying executive who has been gifting most of his savings to a discretionary trust which he controls and uses to invest. The returns from the investments are distributed to a bucket company. The plan is to draw out the funds from the bucket company when Bart retires. The trouble is Bart is the sole shareholder of the bucket company as when it was set up he was single and is now married with children.



He now realises that when him and his wife retire there will be no flexibility to distribute income from the bucket company to the wife by having the company pay dividends because she is not a shareholder.



To fix this issue a simple solution may be to set up a second bucket company, making sure it is also a beneficiary of the trust. The shareholder of the bucket company could be the trustee of a new discretionary trust. It should not be the same discretionary trust from which it receives income. From that point on the income from the trust can be distributed to the new bucket company.



Upon retirement Bart can receive dividends from the first bucket company and the spouse can receive a dividend from the second bucket company, via the second trust. Around this time their children might be over 18 and still working so the dividends could also be diverted to them from the second bucket company.



Upon Bart’s death the shares of the first bucket company can be left to the trustee of a Testamentary Discretionary Trust (TDT) which can then distribute dividends to Bart’s grandchildren who will be taxed as adults. This gives added tax benefits that a normal discretionary trust does not give.


This is a simple solution that doesn’t need any transfer of shareholders or the extra CGT which would go along with that. Depending on the timelines involves and the family make up it can result in a better tax outcome all while potentially avoiding CGT.


See my other tips on bucket companies

Legal Tip 93: Bucket Companies as Beneficiaries of Trusts Legal Tip 93: Bucket Companies as Beneficiaries of Trusts


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


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


Legal Tip 191: Testamentary Trusts and Bucket Companies Legal Tip 191: Testamentary Trusts and Bucket Companies


Legal Tip 195: Multiple Bucket Companies as an Estate Planning Strategy Legal Tip 195: Multiple Bucket Companies as an Estate Planning Strategy


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


Legal Tip 207: Bucket Companies and Death Legal Tip 207: Bucket Companies and Death


Tax Tip 108: Using Bucket Companies to Save Tax Tax Tip 108: Using Bucket Companies to Save Tax


Tax Tip 111: Getting money out of a Bucket Company Tax Tip 111: Getting money out of a Bucket Company


Tax Tip 200: Claiming Interest on a Loan from a Bucket Company Tax Tip 200: Claiming Interest on a Loan from a Bucket Company

 

Does it matter if the discretionary trust with most of Bart's savings has a personal trustee or a corporate trustee?

 

It matters in that there are different comsequences.

 

What type of consequences would there be? Since the discretionary trust only holds money and doesn't trade in any business or hold any real estate, I thought it wouldn't really matter if personal or corporate trustee.

 

Of course it matters.
- what happens on death, incapacity, litigation, trustee indemnity, vesting, etc

 

@Terry_w Curious to know, if Bart wanted to transfer/sell shares of the bucket company to another discretionary trust, what is the value of the bucket company for CGT purposes?

 

I don't know how the shares of a bucket company would be valued, but would think they are just worth what the retained earnings of the company are worth. The transfer of shares could trigger a large CGT event.