By 2022 there will be more than one million trusts operating in Australia. While changes in the law may potentially be in the wind, the uses of various types of trusts for both business and personal investment are envisaged to continue to grow because the tax treatment of trusts is not the sole driver of their use despite what some may believe, writes Andrew Aitken, Principal at Russell Kennedy Lawyers.
Choosing the right trust for the situation
Not all trusts are created equal nor should they be the same. “Off the shelf” trusts are more often than not dangerous as they are unlikely to address the specific needs and wants of the clients initially and often well into the future. Beware taking a “one size fits all” approach as this is a client/advisor relationship killer.
There can be no exhaustive list of issues you should consider when choosing the right trust, its terms and the roles but any such list should include the following considerations:
- Asset protection.
- Tax efficiency.
- Estate planning.
- Availability and ease of obtaining funding for the structure.
- Characteristics and relationships of the persons in control of the trust.
- Potential for loss of capacity, relationship breakdown of the persons in control of the trust.
- Discretions and powers made available to the trustee (broad or narrow).
- Ease of change in proposed structure – both of the Deed and the persons in certain roles. Tax, duty and other implications of such change.
- Should the Trustee be an individual or corporate entity?
Clients may ask whether they can use a trust for more than one purpose. The simple answer to this question is “they can but they probably shouldn’t”. In practice the answer will depend on whether that use is a business use or an at risk use. Though additional costs, paperwork and more complicated tax affairs will result from setting up a separate trust, the business risks or risk of relationship breakdown far outweighs the attraction of simplicity. This is an example of where short term thinking can lead to massive problems.
Using a Corporate trustee
Where continuity is important, particularly in decision-making, advisors should consider whether to use a corporate trustee. The main advantage of using a corporate trustee as opposed to an individual is that a Corporate Trustee doesn’t lose capacity, doesn’t die and doesn’t go bankrupt. The use of a Corporate Trustee facilitates the transfer of control, as this is done by transfer of the underlying shares and/or appointment of directors of the Corporate Trustee. It also avoids the administrative charges associated with the change in name and transfer of assets from one Trustee to another, as well as avoiding triggering any stamp duty implications. Naturally, there are the associated fees for registering a company which is to act as the Corporate Trustee and pay the ongoing annual ASIC fees, but this additional cost is usually well worth the peace of mind it gives.
Nevertheless, the use of Corporate Trustees should be done carefully because under most Constitutions the owners of the shares have the right to appoint Directors and if a shareholder loses capacity or passes away, then the person who is appointed under any Power of Attorney or the person who is the Beneficiary under that person’s Will has this power. In respect of a Discretionary trust, whoever has this power can then usually control who receives income and the like. If this power falls into the wrong hands, then the whole initial intention of the trust and those beneficiaries who were intended to benefit under it can be circumvented.
Trusts are often set up for the purpose of income splitting or asset protection. The focus on these matters, while important, means that other matters are rarely given appropriate consideration. There is too much focus when setting up structures, on the issues immediately present and not what might happen in the future. Advisors must consider whether the benefits of short term tax savings outweigh the risk considerations of using a particular trust structure. Relationship breakdown, lack of capacity, death and (to a lesser extent) bankruptcy, claims and disputes are likely to happen so advisors need to consider all of these matters and give them appropriate weight at the time the structure is initially advised on and set up. The failure to do this and to read the Deed are the most common problem areas, so please avoid them as they are not good for clients nor your business.
 Ashton de Silva et al, Current Issues with Trusts and the Tax System: Examining the Operation and Performance of the Tax System In Relation To Trusts, With a Particular Focus on Discretionary Trusts Linked to High Net worth Individuals (RMIT, 2019) (Commissioned by the Australian Taxation Office).
Andrew Aitken, Principal at Russell Kennedy Lawyers, practices principally in the areas of commercial law, succession and estate planning. He provides wise counsel concerning commercial affairs and complex family relationships to protect assets and avoid conflict for future generations. He regularly assists with modest or complicated arrangements, wills, trusts, business structuring and succession planning (whether business, rural or otherwise). Andrew provides advice on the sale and purchase of businesses and companies, corporate governance, risk management and a wide range of issues facing SME owners, including intellectual property, shareholder agreements and commercial contracts.