We’ve heard a lot about investing in trusts, but while they may be a great vehicle, there are some things you need to be a little bit aware of.
Here’s what he said:
Kevin Turner: Life of 80 years. What’s that all about?
Rob Balanda: It’s an old rule called the Rule Against Perpetuities. That’s right, Kevin. Family trusts, and there’s over half a million of them, registered tax paying ones in Australia, genuine vehicles for carrying on business and protecting your assets, but the people do not realize that they have a life of 80 years.
It’s called the Rule against Perpetuities. That means after 80 years, the trust just collapses. That’s becoming a source of angst amongst investors and their professional advisors in recent times because these trusts really came into their own back when John Howard was Federal Treasurer and he was encouraging people to use them effectively.
So a lot of Baby Boomers like me set them up. Now those trusts are halfway into their 80-year life and looming on the horizon is an end date, not for me but for my kids, all right?
Kevin Turner: What happens at the end date, Rob?
Rob Balanda: The trust collapses, Kevin, and all the assets vest in the beneficiaries. The grandkids might say, “Yaa, hoo, well done.” But what that is, that’s deemed to be a capital gains tax event and in a lot of cases a GST event, and that will trigger the payment, wait for it, it could literally be multi-billions of dollars to the federal government.
That’s the reason for the angst. People have been in recent years rushing to find some solution to that. There’s two potential solutions, Kevin. One is, well, let’s just go in and amend the trust documentation and extend the date from 80 to 150.
Kevin Turner: Can you do that?
Rob Balanda: Nope. Can’t do that, mate. The law is crystal clear on that.
So the other solution is, oh, OK, well, we’re stuck with that, but let’s set up all new trusts in South Australia where this rule against Perpetuities’ end date doesn’t apply.
There’s two professional strains of opinion about the ability and the effectiveness of doing that. There’s one body of professional opinions says, yes, you can do that as long as the trust paperwork says the laws of South Australia apply and you use a South Australian trustee, a company registered down there with or people living down there, then it’s all real and you can do it.
There’s a contrary opinion, though, that says, no, no, no, this is all just problematic. It doesn’t matter, say these other experts. These are senior partners in big law and accounting firms with these different points of view, Kevin.
It doesn’t matter, it’s where, what law, what state has the greatest connection to the trust. So if all of the assets are pretty well in Queensland, it doesn’t matter.
You say the law of South Australia applies, the law of Queensland applies, and you’ve got the 90-year limitation. Then you’re probably thinking this must have happened somewhere else in the world, Kevin.
Kevin Turner: I was thinking that.
Rob Balanda: In the United Kingdom, it has. Some years ago the United Kingdom passed laws extending their trusts by another 30 years, so just flipped it down a generation.
[sam id=37 codes=’true’]That’s great. That very well could be what happens here. Each state has prepared and introduced its own laws to fix this up, and my bet is that it’s probably what does what happen.
The state government, once this date starts to loom larger, they don’t want the feds picking up this massive windfall of revenue without them sharing in it, so they’ll just step in and pass legislation like they did in the UK.
Kevin Turner: Isn’t that only just putting it off?
Rob Balanda: Yeah, that’s a good point, Kevin. The state governments in each state can’t fix it, so they just take away this rule. That’s what they probably should do. But there’s a big issue there, so what this means for you as an investor is if you’ve got an existing trust, well, there’s nothing you can do to alter that date, but, if you’re looking to set up a new one, you ought to talk to your professional advisors.
Do I set one up in South Australia or not? People ask me the question. My take on it, Kevin, is my client base is essentially small- and medium-sized business people and investors, and what I see all the time is that, when Mum and Dad die, they’re coming through the door here, and we talk to them about the trust, and all they want to do is wind it up, collapse it, and then split the assets up, so my client base, it’s not really an issue. But in the bigger or medium-sized, big end of town, I know it is.
Kevin Turner: OK, so most people listening probably are at the stage you talked about, that small to medium sized. I know I certainly am, and we have a trust, so in the event that both Carol and I pass on, the kids are able to file that down and there’s no capital gains tax applied?
Rob Balanda: Well, there will be usually, and there could be some GST, but it is what it is. The family just pays it. In a lot of cases the money just burns a hole in the pocket. They just pay it and get on with it. There’s no interest in maintaining the trust in going forward and letting it sort of live for generations.
Kevin Turner: Which is why you set them up to start with.
Rob Balanda: It’s one of the reasons some people do, but it’s a big source of conjecture out there, mate. There’s one partner, tax partner in a big national law firm with 100 lawyers I was talking to recently, he said to me three years ago he was doing one of these South Australian trusts every two months. He said now he’s doing three or four a week. That’s just one man, but in a big firm.
Kevin Turner: OK, well, thanks for bringing it to our attention, Rob, and we will continue to follow it through, too. If there’s any more information on it you’ll let us know.
Rob Balanda: Yes, I will, Kevin.
Kevin Turner: My guest has been Rob Balanda from MBA Lawyers. Rob, thanks for your time.
Rob Balanda: Thank you, Kevin.
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