How to Use Family Trusts for Wealth Creation


Family trusts still remain some of the most portent investment, wealth creation and wealth preservation vehicles for high networth individuals. The main draw of these trusts is that they can be repurposed to serve various needs. They are becoming particularly attractive as the “other” option as the ATO tightens the screws on superannuation rules, particularly on the super limits. Any investor looking for the alternative vehicle for wealth creation and protection always gives the family trusts a serious look.

Family trusts can boost your portfolio if they are part of a diversified investment strategy that also includes superannuation. On top of boosting your superannuation balances, you should consider establishing family trusts to hold most of your family’s investment assets.

Family trusts can hold a vast spectrum of assets such as:-

  • Your investment properties
  • The investment portfolio which includes diverse assets
  • If you own an SME, you can use a family trust to hold the shares of the business operating entities.
  • You can also use the family trust to hold the business premises of the operating entities.
  • Use the trust to hold the personal use assets such as boats or holiday homes.

The Advantage of a Family Trust over an SMSF

The main advantage of the family trusts over superannuation funds is that you don’t have to grapple with many restrictions on the amount of money that you can contribute to the trust. Besides, the family trust structure doesn’t impose any strict compliance requirements. The most important steps to take is documenting the distributions from the trust to the trust beneficiaries, lodging tax returns and preparing the trust’s annual financial accounts.

This flexibility makes the family trust a perfect complement to the self-managed superannuation funds (SMSFs). To build your family wealth, however, it is prudent to begin by maximizing on the opportunities available in the superannuation funds with the annual concessional contributions.

If you still have extra cash after maxing out on your SMSF, you can choose to make non-concessional contributions to your SMSF and then loaning the extra cash to the family trust. The trust can subsequently use the cash to acquire some investments or assets.

You Can Use Both an SMSF and Trust

Fortunately for many contributors, these two options are not mutually exclusive. You can use both a family trust and an SMSF for your family wealth strategy. The trick is structuring out your contributions and family trust distributions to minimize the tax burden as much as possible. As an investment or wealth creation vehicle, a family trust will provide you with the following advantages:-

  • You can have stronger asset protections from your creditors. A trust is a separate legal entity so it is easy to separate your personal assets from trust assets.
  • A big allure of a family trust is the level of flexibility that it offers you when it comes to the distribution of the income and the capital. For families with some sizeable assets, a trust can offer a fairly tax-effective trust income distribution to family members on a lower income bracket thereby radically minimizing the tax obligations. Family trusts are some of the best tax minimization tools.
  • A family trust provides a seamless perpetual succession. Because it is not part of the deceased estate, the trust can be easily passed down the generations no matter the terms of the will.
  • Family trusts will boost your ability to leverage the small business capital gains tax. With a family trust, you can get the 50% discount on capital gains tax which can result in considerable savings.

Weaknesses of Family Trusts

One of the main weaknesses of family trusts is that any losses from the negatively geared investments will remain inside the trust and are not distributable to the family members or trust beneficiaries. The losses can be carried forward to subsequent income years to offset against future trust income. But the trust structure is still preferable, especially where the trust begins to generate wealth.

Family Trusts in the Light of the Superannuation Changes of 2017

The superannuation changes of 2017 that reduced the concessional and non-concessional contribution limits thrust the family trusts into the limelight as the next best alternative for wealth preservation and wealth creation.

With the reduction of the annual non-concessional contribution cap to $100,000 and concessional contribution cap to $25,000, a couple is now able to contribute a maximum of only $250,000 to an SMSF between them annually.  If the couple has additional funds that they wish to invest, they will have to look for another investment vehicle. This is where a family trust comes in handy.

Secondly, the super balance is now capped at $1.6 million at the start of every year. This is the total amount of assets that you can safely dip into your super and still benefit from a tax-free pension. If you have maxed out on this, a family trust can be good outlet for storing extra assets outside the superannuation.

Funds stored in a trust offer greater flexibility. You can draw on them at any time or pass them down to your descendants or charities without any tax implications. However, the amounts left in the SMSF after the death of the second spouse have to be distributed to their beneficiaries with tax consequences. If you are thinking succession, a family trust can be advantageous in this regard. A tax accountant Melbourne practice can you help you structure out your wealth holding structures that will maximize on tax concessions and opportunities while preserving and growing your wealth for future generations.

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