Reduce Your Tax & Protect Your Wealth by Putting Assets into a Trust

DG Institute
DG Institute

Published 2:17 am 22 Jun 2021

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Trusts are a great way to secure your assets and manage your taxes.

Without protection, your hard-earned assets are vulnerable to creditors, lawsuits and even a partner after a separation – meaning that you could lose your assets quicker than you accrued them.

If you get into a car accident or someone injures themselves on your property or at your business, you could be sued, and your assets could be put at risk.

The more wealth you have accrued, the more you risk losing.

As such, you should insulate your assets as best you can to ensure nobody can pull the rug out from under you. One of the best ways to do this is by putting your assets into a trust.

Trusts are a tried-and-true method of asset protection that can help to reduce some of the expenses associated with your assets like stamp duty and income tax.

Let’s learn about trusts.

What is a trust?

A trust is a private arrangement through which one party, the ‘settlor’, gives ownership of their property or assets to an independent third party or ‘trustee’, who then holds and directs assets on behalf of beneficiaries.

In essence, a trust is an agreement between three groups of people, the party funding the trust, the party holding the trusts assets, and the party who will receive the assets.

A trust is established through the creation of a ‘deed of trust’ which outlines the tailor-made terms and conditions unique to that trust.  

A trust can be used for all kinds of financial activities such as to purchase real estate, to lend money, borrow money, trade shares on the stock exchange or buy a business.

Once the deed of trust is signed and the settlor deposits money into the trust bank account, the settlor’s role in the transaction is finalised and they play no further part in the trust.

One of the key features of a trust is that it separates the control of assets from the owner of the asset. This can have both tax and asset-protection implications.

There are several different types of trusts, each of which can serve a specific function depending on an individual’s circumstance.

The benefits & Importance of a trust for asset protection

Setting up a trust – particularly a discretionary or family trust – can buttress individuals and their assets from creditors by handing ownership of the assets to the trustee.

As an example, if an individual purchases an investment property in the name of a discretionary trust, all income generated from the property goes back into the trust.

This means that the trust owns the asset, and even if the settlor goes bankrupt or has legal action taken against them, it will be difficult for creditors to go after the property because it is not in the settlor’s name.

A trust can be hugely beneficial in protecting personal and business assets; however, it is not a guarantee. With that in mind, a Vestey Trust can provide individuals and businesses an additional layer of security when attempting to protect their assets.

Find out which type of trust best suits your financial situation here.

Can a trust be changed?

Depending on the conditions stipulated within the deed of trust, changing aspects of a trust can range from being relatively simple to quite difficult. As such, you should review the deed of trust to see if the proposed changes are allowed.

If the trust deed does not allow you to execute the desired changes, you may have to execute a deed of variation, which is a legal document that alters a clause or clauses of a contractual agreement.

In some cases, changing a trust can result in having to “resettle” that trust, which effectively means that a new trust needs to be created. Resettling a trust comes with additional tax and duty payment obligations, and as such, it is always prudent to seek legal counsel prior to attempting to change a trust.

Do trustees have to pay tax?

A discretionary or family trust doesn’t pay tax on income from within the trust, but rather, beneficiaries pay a tax rate that is based on their income from the trust.

However, for all trust income that is withheld or that has not been assigned to a beneficiary, the trustee will have to pay the top marginal tax rate of 45%. Additionally, the trustee is required to pay tax on trust income that is given to non-Australian residents under the age of 18.

How can trusts be utilised for tax purposes?

Aside from asset protection, trusts are commonly utilised in order to spread income across several parties among lower tax thresholds and reduce the total taxes spent in total on the trust income.

Because the income of a trust is taxed once it reaches each beneficiary, beneficiaries are taxed according to their individual marginal rate.

For example, if a married couple with two adult children have a combined income of $180,000, they would have to pay roughly $50,000 in taxes.

However, if parent 1 sets up a family trust, they can spread that income across the family to lower their tax threshold. If one of the adult children is unemployed, $18,200 can be given to them through the trust, which would eliminate $6,734 from their taxes.

Similarly, if you’re a property investor, you may be able to put an investment property into a trust to reduce your property taxes and CGT.

Trusts: A good way to protect assets and lower taxes?

Whether you have creditors chasing after your assets, or you want to reduce the amount of tax you pay annually, trusts can be a great tool in protecting your assets and wealth.

However, trusts aren’t foolproof and come with their own costs, so it’s important to speak with an accountant before diving head-first into one.

Setting up a family trust can cause issues if conflicts or disputes arise among family members, and the trust itself can often be the cause of the conflict. For example, if one child receives more income than another, they may begin to dislike one another, or the parent responsible for the financial disparity.

Moreover, setting up and maintaining a trust comes with its own costs, and if the income of a trust isn’t distributed, the tax implications could be more expensive than the income tax you would ordinarily pay.

As such, trusts can cost more than they are worth if improperly set up. You can learn more about trusts here.

Good Debt Vs Bad Debt With Dominique Grubisa - DG Institute

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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