Trusts and enabling tax benefits

[emac]

Excuse these couple of questions if they sound a bit vague but I'm still learning about Trusts:

1. What is the best way (or ways) to structure an IPs in a Discretionary Trust?

and

2. What are the best way (or ways) to distribute funds to enable maximum tax benefits?

Scenario:
IP Purchase: $150K
Trust Income: $70K-$100K pa
Beneficiary 1 Income: Variable (Paid from the trust?)
Beneficiary 2 Income: $40K

Advice would be much appreciated

Eddie.

 

[DaleGG]

Hi Eddy

There is no such thing as a "best way", I am afraid. There will be options that will suit you better than some, and others better than you. Even then, there will be options that work better for you this year than they do next year, or last year. Of course, family situations also make it hard to say.

Welcome to the world of tax!

I am not sure quite what you mean with your first question, and as for the second . . .

We would normally try to have the trust pay as many "personal" expenses as possible to

a. reduce your need for disposable income; and
b. reduce the profit

Thereafter. we would distribute income to the family members who have no income at all and thus chew up all of the tax free threshholds, then we would distribute income to people in the 17% tax bracket before moving to the 30% tax bracket.

I am sorry this not more of a help, but, there are no easy answers on this one.

Have fun

Dale

ps - do you have a list of those potential tax deductions that I posted some time ago now? If not, let me know and I will post them here again.

 

[Marina]

Originally posted by DaleGG

HI Dale

We would normally try to have the trust pay as many "personal" expenses as possible to


I was reading your manual the other night and you list some of the personal expenses you can claim, but I noticed that a lot of them are related to Business Expenses. Eg. Gifts to staff members, coffee and Biscuits for Office, etc.
I do not have a Business of my own and therefore a lot of those deductions do not relate to just owning property.

If I had a couple of properties in a trust what are some of the PERSONAL expenses I would be able to claim.




Thereafter. we would distribute income to the family members who have no income at all and thus chew up all of the tax free threshholds, then we would distribute income to people in the 17% tax bracket before moving to the 30% tax bracket.


Sorry, but I find this distributing of income quite uncomfortable.

I was discussing this issue the other day and we came to the conclusion that there is no way we could distribute income to our mums and dads, sisters, brothers, grandmas, aunts, uncles etc.

It just some how does not sit comfortably with me to ask if I could put in $5K of trust income into their tax return so I can save tax. Remember these family members are not getting the physical money, but just the distribution.

This somehow seems unfair, and they might even end up resenting us.
Money does cause a lot of family tension. So I would be hesitant in doing this in fear of the above.


There is a lot of room for confusion with the tax liability on the trust income. This of course would interfere with their own salary and deductions and it is not always easy to explain or show the actual liability on the trust income. I know you mention that you pay the tax liability on the trust income, but as i said there is a lot of room for confusion there.
Please understand there is no confusion for me, but family members would be confused.

Also these days extra income interferes with pensions, family tax benefits, etc, so I feel it is really hard to ask such a big thing of family members just so you can save tax.




I am sorry, but I don't quite click with this idea or concept.

If I have misunderstood this in some way please forgive me.


Marina.





ps - do you have a list of those potential tax deductions that I posted some time ago now? If not, let me know and I will post them here again.

 

[Rolf Latham]

Hi Marina

I found this sort of thing a little difficult in the first place too, however as I further investigated I found that it can work quite well.

The idea of distributing the income needs to be done with some foresight and planning in mind. If for example there is a risk of affecting pension entitlements etc then you manage that. Understand that as part of the distribution process, a benficiaries additional tax has to be paid out of the distribution.

Needless to say, you do require the beneficiaries to play ball.

Ta

Rolf

 

[emac]

Hi Dale,

I would be great if you could re-post that list of those potential tax deductions.

Thanks for your help,

Eddie.

 

[Richard Hunt]

Hi Marina,

I'm sure Dale's not suggesting you jeopardise your relationship with everybody in the family tree to minimise your tax.

In most family trust situations you'll find that mum, dad, the kids and less frequently an entity controlled by mum/dad, will be the major beneficiaries of the trust's income from year to year.

 

[Lissy]

One thing on this topic - and I've been one of those people who has been distributed to in the past and it was a TOTAL nightmare. I've told my dad I refuse to do it again!!!
If I distribute money to various people, say for example, my sister, am I correct in thinking that if the trust keeps that money and it's only a distribution on paper, that the trust then has a liability to my sister? So if down the track she says, hey, I want that $5,000 you distributed to me 3 years ago, does the trust then have to pay it out to her?

 

[DaleGG]

HI

One of the reasons why these issues are so hard to answer properly is that there is no correct answer. Furthermore, each persons situation demands a different perspective and approach.

If the profit distribution is a book entry then yes, at some stage the sister can demand that money be paid to her.

To get around this, I often suggest that we pay the money at the time, and that th sister keep enough to pay her tax (if any) and a little for her trouble. Again, this is just one option amongst many.

A trust provides options to reduce your taxes legally. Which option you use, and how far you take it is entirely up to you.

Have fun

Dale