Spend enough time on social media and you will eventually hear advice such as:
“Once your business reaches a certain turnover, you need a trust.”
Or:
“Wealthy people do not own assets in their personal names.”
These statements sound authoritative, but they leave out the most important part of any business or estate-planning decision:
Context is king.
A trust can be a valuable planning tool. It can also create unnecessary costs, administrative obligations and tax consequences where it is established without a clear purpose.
Short-Form Advice Often Leaves Out the Details
Short-form content rewards simple, confident answers.
Tax and estate planning rarely work that way.
A recommendation that may be appropriate for one family could be completely unsuitable for another because of differences in:
- family circumstances;
- business risk;
- asset values;
- succession plans;
- personal debt;
- tax position; and
- long-term objectives.
Some online content is also designed primarily to attract attention or sell a course, consultation or pre-packaged structure.
This does not mean that all social media advice is incorrect. It means that important qualifications are often omitted.
A trust should not be created merely because an influencer has announced that you have reached the level at which “successful people need one.”
A Trust Is Not Automatically Tax-Efficient
A common misconception is that placing assets in a trust automatically reduces tax.
Where income is taxed in an ordinary trust, the trust is generally taxed at a flat rate of 45%.
Ordinary trusts also face a higher effective capital gains tax rate than individuals and companies.
The final tax outcome may differ where amounts are taxed in the hands of a donor or distributed to qualifying beneficiaries. However, those rules are technical, depend on what occurred during the relevant year, and may also trigger other tax consequences, including donations tax.
The assumption that “a trust pays less tax” is therefore often wrong.
A Trust Does Not Make a Business Bulletproof
Another common claim is that placing a company into a trust protects the business from being sued.
A trust may own the shares in a company, but the company remains a separate legal entity carrying on the business.
If the company breaches a contract, incurs debt, causes loss or becomes involved in litigation, the company can still be sued.
Trust ownership does not remove the company’s legal obligations or protect the company’s own assets from its creditors.
The structure may separate ownership of the shares from an individual’s personal estate, but it does not make the operating business untouchable.
Trusts Create Ongoing Responsibilities
A trust is not a document that can be signed and forgotten.
Trustees are responsible for administering the trust, maintaining proper records and complying with their tax and administrative obligations.
Depending on the trust’s activities, ongoing requirements may include:
- trustee resolutions;
- accounting records and financial statements;
- annual income tax returns;
- provisional tax submissions;
- beneficial ownership records;
- asset registers;
- loan-account records; and
- supporting documents for distributions.
The choice of trustees is also important.
Assets placed in a trust are no longer owned personally by the founder or beneficiaries. Where the trust owns shares in a company, decisions relating to those shares are exercised through the trustees.
A difficult, uncooperative or dishonest trustee can therefore delay decisions, disrupt transactions and create significant administrative and financial problems.
The trust deed, appointment of trustees and decision-making arrangements should be considered carefully before assets are transferred to the trust.
A trust structure only works properly when it is administered as a separate arrangement.
When May a Trust Make Sense?
- Estate and succession planning
- Providing for vulnerable beneficiaries
- Preserving family assets
- Business succession
- Separating ownership from an individual’s estate
- Managing assets under a defined framework
Start With the Objective, Not the Structure
Sometimes a trust is the correct answer.
Sometimes a will, properly structured company, shareholder agreement, insurance policy or beneficiary nomination may achieve the objective more efficiently.
And sometimes no additional structure is required at all.
Context Is King
A trust is neither automatically good nor automatically bad.
It is a legal and estate-planning tool whose value depends on the purpose for which it is used.
Generic income thresholds and social media rules cannot replace an assessment of the person’s family, assets, business risks, tax position and succession plans.
Do not begin with the assumption that you need a trust. Begin with the outcome you are trying to achieve.
Are You Considering a Trust?
Before establishing a trust or transferring assets into an existing trust, the purpose, tax consequences, governance risks and ongoing compliance costs should be considered.
Book a strategy consultation with us to assess whether a trust is appropriate for your circumstances and how it should fit into your broader business and estate plan.
Disclaimer
This article provides general information only and does not constitute tax, legal, financial or estate-planning advice. Trusts and ownership structures have legal and tax consequences that depend on the specific facts and objectives of each person or family. Professional advice should be obtained before establishing a trust or transferring assets.
