Most suitable vehicle for intergenerational investing

But then what is the specific advantage of using a holding company?

e.g. 1 Deceased owns shares in Holdco which owns ASX listed shares. Shares in Holdco are transferred to the testamentary trust. 79 years later shares in Holdco are transferred without stamp duty or CGT implications to the (now old) grandchild. Grandchild dies and shares in Holdco are transferred to a new testamentary trust.

e.g. 2 Deceased holds BHP shares directly. Shares in BHP are transferred to the testamentary trust. 79 years later the BHP shares are transferred without stamp duty of CGT implications to the old grandchild. Grandchild dies and BHP shares are transferred to a new testamentary trust.

 

Sounds like that should be the real question here.

I’m trying to get my head around one thing here.
Any assets an individual owns can go into a testamentary trust upon death. If you own a company as an investment vehicle, then the shares of that company go to the testamentary trust and not the actual investments in the company.

In that case the investments are still stuck in a company and never get access to the capital gain discount. Is that not the same as just as handing over the shares when you pass as part of your will?

I see the tax benefit of testamentary trusts being able to distribute to minors. That seems the only real advantage. It looks to me that the key would be to have all investments in your personal name and on death the individual investments move into a testamentary trust. But the tax slug you would cop in between now and the time you pass would be painful.

 

Do your best and leave your kids do the rest. Someone told me wealth won’t keep beyond the third generation. So enjoy your share while alive!

 

I have heard that. That’s why I’m trying to do everything possible in the hope that it can keep going and not fall apart by the third generation.
Unfortunately it’s in my nature to always be planning well into the future. If I can make the extra effort now and set up kids / grandkids to be in the best possible position then why not. I don’t see it as that much extra effort for me.

 

Benefits of a company to hold the shares? It could be any of these
- allows for income to be reinvested and taxed at 30% allowing for more compounding
- allows for ease of adding 'partners' while alive. Transfer 10% of the shares of the holding company instead of all the individual shares owned.
- Company A can borrow from Company B without needing to be a division 7A loan, .eg. a trading company lending a related company retained earnings.
etc

 

no because the company can retain earnings while you are alive.

BTW, I am not recommending someone hold shares via a company.

 

have a read of this book:
Die with Zero: Getting All You Can from Your Money and Your Life

by
Bill Perkins
Die with Zero: Getting All You Can from Your Money and Your Life by Bill Perkins

it is one of the best estate planning books I have ever read. His idea is that you should not be leaving anything to anyone when you die because it can be put to better use before then.

 

but if a tt can have a upe against a minor beneficiary, isnt that more tax efficient?

 

not sure what you mean

 

A tt can earn 7k in franked dividends, distribute 7k franked dividends to the beneficiary. Keep the 7k as a UPE and reinvest.

the beneficiary gets the 3k refund of franking credits.

In a company owned by a tt, the company would get net 7k (tax offset by franking credits) to be reinvested. The 3k franking credit is temporarily trapped in the company?

 

it might be risky for TDT to do that. There are various issues such as s100A, s102AG anti-avoidance provisions.
But lets say it can.
If there was a company with its shares held by a TDT, the company can pay a dividend with franking credit the same, the difference being getting the money back into the TDT for compounding - which is why i think it risky for retaining earnings in a TDT.

 

This is what is unclear.

can a tt receive a 7k franked dividend, distribute to a beneficiary, but keep the 7k cash and record a UPE and all future income including income from the reinvested 7k retains s102AG nature?

the 3k would be a tax refund to the beneficiary and spent by the beneficiary. Understand that no new money should be added to the tt, but reinvestment of income from assets transferred from the deceased estate?

 

If the deed allows it the trustee could do that. But there would be various consequences.

 

I should say if the will allows it as testamentary trusts are not set up via deeds, but wills.

 

I will have to do some more homework on this testamentary trust thing. Looks like a good idea regardless of how you hold your investments today.

I guess it comes down to doing some number crunching on what would provide the best tax outcome overall. Give up capital gains discount benefit and use a company, which can continue on for as long as desired. Or continue on in a discretionary family trust and deal with having it expire in 80 years time and having to deal with the CGT when it comes time liquidate or transfer the assets.

Anyone have any knowledge about the South Australia option? I read that trusts setup in south aus don’t need to have a perpetuity date.

 

SA has removed the rule against perpetuities but that does not mean SA trusts can last forever. It is also unlikely there where the trustee is located outsider of SA and the assets are outside of SA the trusts will still have to vest.

Its good marketing though. I can personally guarantee that a SA trust, however defined, will not need to vest within 80 years!

 

Ok that’s something to work with. How about a corporate trustee being a company setup and registered in South Australia. The director of the corporate trustee can live wherever.
How does where the assets are located be relevant? If it holds shares and properties located in different locations throughout the country does that play a role in the rules the trust must operate under with relation to vesting after 80 years?

 

in my opinion unless everything is in SA, even central control and management you are dealing with uncertainties.

 

I would be seeking specific legal advice on the issues with a trust that seeks to control assets for 80+ years. It may actually be contrary to the interests of beneficiaries. Some people seek to extert control limitations from the grave and it may not always be wise. eg what benefit may there be if the kids are allowed income, but not capital for a trust which is intended to exist for 80+ years ? What sort of tax planning were your ancestors doing for you back at the start of WW2 ? Many TT's may want to consider a handover to beneficiaries at a certain time when they have suitable capacity to make wise choices.

 

Requires a different mindset. If a person is in the position to do so one possible approach is:

Let them screw up and hopefully learn. Baby-sitting should end sooner than later.