Invest
How to halve costs of child support through a trust
Organising your affairs into a cost-effective family tax structure is relatively common, but many investors don't realise tax structures can help when the family relationship breaks down.
How to halve costs of child support through a trust
Organising your affairs into a cost-effective family tax structure is relatively common, but many investors don't realise tax structures can help when the family relationship breaks down.
In fact, for professionals who find themselves getting a divorce, thinking early about how best to pay child support can see them legally halve the real costs by bringing the children into a trust arrangement.
There’s no doubt that the breakdown of family relationships is both stressful and expensive, especially if the parent paying child support is finding the funds out of after-tax earnings.
But by looking at restructuring the lead provider’s income and transferring the funds to the children through a trust, people earning in the top marginal tax rates can keep payments high while reducing their tax burden.
Income earned from those assets by the children can – in many cases – then be tax free, increasing the funds available to younger members of the family.
Normally, income earned by a child is penalty taxed once it exceeds $416 in a year, but in certain circumstances the tax law allows children to the pay the same rates of tax as adults. In other words, when in the proper structures, children of divorced parents can earn the first $18,000 of income tax free and that money can be used to pay the child support.
For many divorced or separated professionals, this is a legal way to structure their affairs so some of the family income is earned in a structure set up to provide maintenance for their children. The money earned by this structure can then be used to fund the child support payments as well as other living costs of the child.
However, there are a number of requirements that need to be in place for the arrangements to be considered.
Besides the simple requirements (being a parent of the children and no longer married to your spouse), there must also be a court order, assessment or agreement in place that require you to pay support for the children.
The client can then transfer property or assets to a trust for the children’s benefit, giving effect to the legal obligation under the order, provided the terms of the trust require your children or their estate to own the assets when the trust ends.
Among other specific requirements, the tax law requires some property be transferred to a trust for the benefit of your children and that property must ultimately pass to them.
The income needs to be generated from that property. The issue is deciding what property can we transfer to a trust that you are ultimately happy for your children to keep — and that will generate sufficient income to make the establishment of a trust worthwhile.
An existing discretionary family trust is not sufficient, but it is possible for professionals to transfer units in a professional practice services trust to a newly established child maintenance trust.
For the family — and the children in particular — the financial benefit can be substantial over the years.
As an example, if a paying parent had three children and the assets in a trust generated $90,000 in income, the total tax payable would be $7,191 compared to $42,300 if the parent was paying child support after tax at the top marginal rate.
This is a saving of over $35,000 a year. It means that everyone is better off, and it becomes much easier for the family to maintain a pre-separation lifestyle.
Geoff Thompson, Partner, Pitcher Partners
Investment insights
Centuria announces senior internal promotions, strengthening leadership team for new property growth cycle
Centuria Capital Group (ASX: CNI or "Centuria") has strengthened its senior management structure with several internal promotions, effective from Monday, 15 April 2024. The new senior roles are part ...Read more
Investment insights
Institutions and wealth managers favour fixed income over equities, research shows
New research from Managing Partners Group (MPG), the international fund management group, shows professional investors believe fixed income is becoming more attractive than equities over the next 12 ...Read more
Investment insights
Gold prices soar to record high: Two surprising factors fueling the surge
Gold prices have hit a fresh record high, nearing $2,300 an ounce in Thursday trading, and while geopolitical tensions and expectations of interest rate cuts by the US Federal Reserve are commonly ...Read more
Investment insights
Alternative fund managers expect increased fines for regulatory breaches, survey reveals
A new study by Ocorian, a market leader in regulation and compliance services, has revealed that alternative fund managers anticipate a rise in fines for breaking regulations in their sectorsRead more
Investment insights
Institutional investors set to increase allocations to illiquid assets, MPG research reveals
A new study by international asset management company Managing Partners Group (MPG) has found that more than three-quarters (78%) of institutional investors and wealth managers plan to increase their ...Read more
Investment insights
Vanguard reduces management fee for its Australian Government Bond Index ETF
Vanguard Australia has announced a reduction in the management fee for its Vanguard Australian Government Bond Index ETF (ASX:VGB) by four basis points to 0.16% per annum, effective from Monday. Read more
Investment insights
Institutional investors and wealth managers recognise digital assets' role in diversification
A new global research study by London-based Nickel Digital Asset Management (Nickel), a regulated and award-winning digital assets hedge fund manager, reveals growing mainstream acceptance of digital ...Read more
Investment insights
Chinese and European brands dominate top 5 most valuable insurance brands: Brand Finance report
The latest Brand Finance Insurance 100 2024 report reveals that Chinese and European brands continue to dominate the ranking of the world's most valuable insurance brands. Read more
Investment insights
Centuria announces senior internal promotions, strengthening leadership team for new property growth cycle
Centuria Capital Group (ASX: CNI or "Centuria") has strengthened its senior management structure with several internal promotions, effective from Monday, 15 April 2024. The new senior roles are part ...Read more
Investment insights
Institutions and wealth managers favour fixed income over equities, research shows
New research from Managing Partners Group (MPG), the international fund management group, shows professional investors believe fixed income is becoming more attractive than equities over the next 12 ...Read more
Investment insights
Gold prices soar to record high: Two surprising factors fueling the surge
Gold prices have hit a fresh record high, nearing $2,300 an ounce in Thursday trading, and while geopolitical tensions and expectations of interest rate cuts by the US Federal Reserve are commonly ...Read more
Investment insights
Alternative fund managers expect increased fines for regulatory breaches, survey reveals
A new study by Ocorian, a market leader in regulation and compliance services, has revealed that alternative fund managers anticipate a rise in fines for breaking regulations in their sectorsRead more
Investment insights
Institutional investors set to increase allocations to illiquid assets, MPG research reveals
A new study by international asset management company Managing Partners Group (MPG) has found that more than three-quarters (78%) of institutional investors and wealth managers plan to increase their ...Read more
Investment insights
Vanguard reduces management fee for its Australian Government Bond Index ETF
Vanguard Australia has announced a reduction in the management fee for its Vanguard Australian Government Bond Index ETF (ASX:VGB) by four basis points to 0.16% per annum, effective from Monday. Read more
Investment insights
Institutional investors and wealth managers recognise digital assets' role in diversification
A new global research study by London-based Nickel Digital Asset Management (Nickel), a regulated and award-winning digital assets hedge fund manager, reveals growing mainstream acceptance of digital ...Read more
Investment insights
Chinese and European brands dominate top 5 most valuable insurance brands: Brand Finance report
The latest Brand Finance Insurance 100 2024 report reveals that Chinese and European brands continue to dominate the ranking of the world's most valuable insurance brands. Read more