As government-mandated limits on superannuation fund contributions take effect, the role of family trusts in retirement planning could be “more important than ever”.
That’s according to SUPERCentral superannuation and estate planning expert, Brian Hor. Mr Hor explained this week that family trusts have always been important in terms of business, estate and tax planning.
However, following the introduction of measures that limit the ability to make concessional contributions to $25,000 a year and non-concessional contributions to $100,000 a year to superannuation funds, the role of family trusts has increased, Mr Hor said.
“Plus, tax free pension amounts are now capped, transition to retirement income streams are no longer tax free, and there are constraints on the ability to use limited recourse borrowing arrangements to circumvent the caps and/or contribution limits,” he continued.
On the other hand, family trusts aren’t as limited by legislation on issues like the requirement for a sole purpose test, limits on trust membership and who can be beneficiaries, as well as to whom the actual distributions can be made.
Further, family trusts are also free from the “stringent legislative restrictions” around conditions of release, what can be invested in, trust borrowings and transactions with related parties.
Commenting on this, Mr Hor added, “Now, this does not mean that SMSFs are dead – they’re still the most tax effective vehicle for members in pension phase, they still attract very low tax on earnings in accumulation phase, they can still access a CGT discount of one-third if the relevant asset was owned for at least 12 months and they are still great as tax effective vehicles for holding business real property.
“However, what it does mean is that, post 1 July 2017, the ideal retirement strategy is now a dual structure: an SMSF for tax free income up to your transfer balance cap, and a family trust for excess monies where you are unable to contribute more to super, or if you can do better than the 15 per cent tax flat rate on your super accumulation account.”
This means a hypothetical non-working spouse and two children at university with the low income tax offset are able to receive about $60,000 per year tax free on $1.2 million invested at 5 per cent in a family trust.
That’s a yearly saving of $9,000 compared with paying 15 per cent on those earnings within super, Mr Hor said.
“A family trust is also useful if you need greater flexibility in terms of access to your funds and the ability to gift or lend funds as compared to super,” Mr Hor said.
“However, family trusts still do need to be regularly updated for changes in the laws and in the family’s circumstances.”
With this in mind, he said a family trust deed should be reviewed in case the deed is too inflexible, “especially as regards the power of appointment of the trustee, or power to amend the trust deed”, he explained.
It should also be reviewed to ensure that it hasn’t been incorrectly drafted.
Continuing, Mr Hor said a third reason could be that “the trust may be close to vesting (or may even have already vested), or the trust deed may simply not say what you think it does – especially regarding who are the beneficiaries, or the exclusion of so called ‘notional settlors’”.
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