A Matter of Trust

Let me share with you some of the issues that come up with Trusts across a Solicitor’s desk.

These may at first glance seem trite (ho hum) but read on as following them will give you real insight into the way Family Trusts work.  After all, there are more than 500,000 of them operating in Australia.

1. Unpaid Entitlements

Over the period of a Trust’s life and through the use of a Trust as a streaming vehicle, Controllers of a Trust may apportion income of the Trust to Beneficiaries to reduce tax, but never actually make payment of the monies to those Beneficiaries.  Eg. parents may on paper to reduce their tax distribute income of a Trust to adult children who are earning little or no income, but never actually distribute these monies to them.

From a parent’s perspective this is payback time.


So what happens with these unpaid monies if they will build up as a loan account for the benefit of the children in the books of the Trust?

One day though they may marry with a 40% to 50% chance of divorcing after that.

If they divorce, then their spouse can claim that these monies, that were never paid to them and which were loaned back to the Trust, are an asset of the marriage and they are entitled to a large portion of these funds.  Oh no!

[sam id=32 codes=’true’]To avoid this possibility Trusts from time to time therefore forgive debts to Beneficiaries, and in particular adult children Beneficiaries.

The problem with forgiving debts is that it firstly can create future tax problems eg. it reduces the cost base of assets of the Trust.

Secondly, it can create tax liabilities now if the Beneficiary is in any way employed by the Trust, as this can constitute a fringe benefit which will attract fringe benefits tax.

What Trusts often therefore do in place of the strategy of forgiving debts, is to minute at a Meeting of Directors the support and contribution made by the Trust to that adult Beneficiary over the years.

This would include their upkeep, education, general maintenance, provision of food and lodging and calculate this to have a value of say $20,000 per annum over 5 years.

This will total say $100,000.  The Trust would then minute that this amount is offset against the amount owing to that Beneficiary under the loan account of say $120,000, leaving a balance owing of $20,000.  In this way this strategy reduces the amount of the loan account.

That is, offset a reasonable estimate for provision by the Trust for that Beneficiary over the years in a certain amount against the amount owing under the loan account.

This is not specific advice and is general advice only.  Any readers who are interested in implementing this should take their own specific advice.


The position of Trusts where a Director/Shareholder declares Bankruptcy

Persons who are facing an imminent bankruptcy generally look for advice about how to deal with assets of Trusts where they are a shareholder / director of a Trustee company.

They often suggest that they resign as a director of the Trustee company, place another friendly member of their family as the sole director of the company and then transfer the shares in the Trustee company to them as well.

The problem with this strategy is that you must declare when you go bankrupt what assets you have disposed of in recent years and you will have an obligation to advise of the transfer of the shares.

This then triggers the question by the Trustee – what are the shares worth?

Are they an asset of your Bankrupt Estate?

Do they have a notional value only or do they have a significant value because ownership of them allows you to control the Trustee Company and therefore the Trust?

In order to avoid this a better approach is simply to replace the Trustee with a new Trustee, namely a company in which the shareholders and directors are friendly to you, or by a personal Trustee, say a member of your family who is friendly to you.

There is no obligation to disclose such a transaction to your Trustee in Bankruptcy.  This example illustrates again that you do not own a Trust, but only control it.

This is not specific advice and is general advice only.  Any readers who are interested in implementing this should take their own specific advice.



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Rob Balanda


Rob is a partner in the Gold Coast based law firm MBA Lawyers. He is a highly regarded educator of property investors and estate agents and the author of the "Made Simple" series of books and CD's.
Visit www.ClausesMadeSimple.com

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