Do I need to establish a Trust? Do I still need the Trust I have?

We often get asked these questions by our clients. And the answer, as it so often is, is “it depends”. It depends on why you want it. Then it depends on the balance between the advantages and the disadvantages to you.

The principal purpose of a Trust is to set assets aside to protect them from a variety of people and organisations such as:

  • Creditors
  • Family
  • Relationship Partners
  • Asset and Income tested benefits and assistance

Protection from family members and organisations tend to be emotive reasons that vary from person to person.

For many clients going into business we recommend Trusts to protect their personal assets from creditors.  Not that you can ever assume the business will get into trouble with its creditors, but what if, for example, someone owing you money went under, didn’t pay you, and dragged you down with them. Or you inadvertently were involved in an industry issue that turned out to be faulty (for example, the leaky building issue) and were sued by one of your customers.

On the disadvantage side, there’s always more compliance and related costs. Accounts, Tax returns, Trustee meetings and management.

A Trust must be managed properly, or it’s at risk of being set aside by the courts.

The biggest issue we find with trusts is that people don’t really understand that those assets they gifted to a Trust are no longer just theirs to do with what they like. They belong to the Trust and any decision around those assets must be agreed to by all the Trustees, and they must consider all the beneficiaries when they do so.

For a fuller description of Family Trusts and their advantages and disadvantages see our ebook here

From an Accounting and Tax point of view, Trusts can end up being interesting entities. They can end up with a collection of assets, some of which create taxable income and some of which don’t. For example they may hold the family home, shares in your company which pays dividends to the Trust, and some investments which earn income.

Income can be distributed either pre-tax paid, to be taxed in the name of the beneficiary, or the Trust pays the tax and distributes after tax profits to beneficiaries. Depending on the Trust rules, there may also be distributions of the capital of the Trust.

We act for many Trusts both as their Accountant and Tax agent, and also as an independent Trustee. For this role we now always operate through a company set up as a Corporate Trustee. This means that any one of the Directors here are available to sign documents if needed, and also if you decide to change Trustee, the shareholders and Directors of that Trustee company can be changed rather than having to have every asset within the trust transferred into different names. If you want to consider us in this role for your Trust, please contact one of the Directors of BW Miller Dean.

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