What is a family trust?
A simple example:
Young Alice and Ben’s grandma has given them $500 each as Christmas gifts. Knowing the kids are under 18, grandma said to them: ‘ You two are really beautiful kids, but you are still too young to take care of the money. How about I gave the money to your mum to ask her to take care of it for you? ‘ Alice and Ben kissed grandma and handed the money to mum Cindy.
If Cindy decided to open a bank account with the money, although the account’s name is under Cindy, but the interest income and principle actually belongs to the kids. If Cindy decided to buy some shares with the money, dividend earned and capital gains realized all belong to the kids. Of course, Cindy can also decide to buy some cloths or pay school fees with the money if she thinks it is appropriate.
This is actually a ‘trust’ – Cindy taking care of the money given by grandma for the benefit of her kids. Grandma is the settler of the trust, Cindy is the trustee, Alice and Ben are the beneficiaries, the $1,000 is the trust property, interest earned from the bank and dividend received are the trust income, profits realized from selling the shares are capital gains for the trust, money used to pay school fees are the corpus (capital) of the trust. Cindy should act in the best interest of her kids with the money. If she spends the money on her own gambling, then she will breach her fiduciary duty to her kids.
Expand your imagination:
Imagine the money is a $1M dollar property which nets a $100K rental income per annum, or a wonderful business which can realize a capital gain of $1M when it is sold. Rather than holding the asset under your individual name, the asset belongs to your whole family (beneficiaries) and you are in charge of the asset as the trustee. In order to protect the trustee, a new empty company should be incorporated to be the trustee with the controller being the shareholder and director.
Benefits of holding the asset in trust:
Disadvantages of holding asset in trust:
Of course trust structure is a lot more complicated than the example. Depending on different situations, different kinds of trusts can be set up, such as discretionary trust which the trust has the discretion to distribute profit & capital, unit trust which distributions are made to unit holders depending on how many units they have, hybrid trust which has the character of discretion and fixed entitlement, deceased estate trust which empower the dead to rule from the grave, and so on and so forth.
So is trust structure better for me? The short answer is it depends! There is no the best structure, only the most suitable structure at a certain time. That is why at ML Tax Solution, we understand our clients’ situation and will go through the pros and cons with you in details and work out the most suitable one for you.