Lately, we’ve been in talks with a client regarding the utilisation of their Family Trust for Asset Protection, and there are crucial considerations related to the use of Trusts in this domain that should be taken into account by accountants in Sydney.
A Trust is started by someone “settling” an amount on the Trust. This amount can be any amount the settlor likes, but in practise, it tends to be a notional amount (ie $10 – $100) settled on the trust by a family friend or professional advisor. Under Section 102 of the Income Tax Assessment Act 1936, the settlor cannot benefit under the trust.
Otherwise, the Commissioner can assess the trustee of the trust on the income earnt during the year at the applicable tax rate that the settlor would incur in his own hands. This stops people from effectively setting up a “revocable trust” where they divert income from the property they settle on the trust (including cash) to other beneficiaries while still retaining the ability to call the capital back to themselves at a later date.
Consequently, if someone wants to settle a significant amount on a trust (so it is no longer seen as one of their assets and so is not exposed to bankruptcy or legal actions against them), they will need to understand that they have lost control of that asset from that point on and they can’t benefit from the trust by way of income distribution or receiving the assets back at the termination of the trust. This is an important consideration. What is most important to you – asset protection or future control over those assets?
In practise, if there are no worries about the asset being exposed to bankruptcy or legal action risks, the asset holder will set up the trust with a family friend or professional advisor settling a notional amount on the trust. Then the asset holder will lend significant funds to the trust to invest and derive income from, which is then distributed amongst the family group (including him or herself). By loaning the funds to the trust, it remains their asset, so it is exposed to the risks mentioned above.
So what could be done if you wanted to have your cake and eat it too? That is, to benefit from the trust through income distribution each year and access to capital at the end of the trust, but still have asset protection on those assets.
Section 102 only applies when a person has created a trust by initially settling the property on the trustee. From a legal viewpoint, a later gift or contribution should not fall within the definition of ‘creating a trust’ as the trust already exists. To back this view up, it is essential that the trust deed is worded in a way to support this. It should be clear that where the trust deed excludes the original settlor from benefitting from the trust (as most trust deeds tend to), the clause in the deed does not go further and exclude later settlers from benefitting from the trust. This can extend to the situation where you forgive a loan to a trust, thus gifting the amount to the trust.
We are not lawyers, but this area is an integral part of your asset protection and structuring planning, so we always consider this when reviewing your affairs and involve lawyers if need be. Among all this is also the consideration of ensuring any asset protection (including gifting property to a trust) is not done with the specific intention of defeating creditors, in which case it could be clawed back into your assets pool at any time.
If you want to use your family trust to protect your assets, it is vital that all of the above is taken into account and you work out what the most critical priority is to you – asset protection or control over and access to the assets. Further, any attempt to protect your assets, as discussed above, will need to be appropriately done considering what your trust deed says to ensure it is worded correctly to support your actions.
If this area is relevant, don’t hesitate to contact your client manager to discuss it.
Kreston Stanley Williamson Team
*Correct as of March 2018
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
