Let’s take a moment to discuss your circumstances. You have a family business or considerable assets, and want to provide for your family while protecting your assets and saving on taxes. How do you achieve all of that in a completely legal and beneficial way?
You establish a family trust.
In the US, a family trust is a discretionary trust established to manage a family business or hold family assets. A family trust provides a number of benefits. In this article, I want to explore three of the most compelling and common reasons for establishing a family trust.
Protect Your Assets
There are a number of ways a family trust helps protect your assets:
- Protect your personal assets from failures related to your business
- Protect family group assets from the liabilities of individual family members – bankruptcy, insolvency, etc.
- Protect your assets in event of your death
- Protect your assets in the case of relationship failure
A family trust can play a key role in your estate planning and help you properly control or transfer your assets. A family lawyer can talk through the benefits of a family trust and help you decide on the right option for your family.
Reduce Overall Tax Paid by Family Business
One of the main benefits of the family trust is that the trustee can distribute income earned by the trust to beneficiaries of the trust in any way they see fit. The trust distributions do not have to go to the same beneficiaries each year or be distributed in the same proportions as previous years.
This allows the trustee to take full advantage of tax laws. The trust does not have to pay income tax on income that is distributed to beneficiaries. The beneficiaries are required to pay taxes on their income, but only on the amount that exceeds his or her tax-free threshold. It is in the trustee’s best interest to distribute the trust income in a way that takes advantage of each beneficiary’s personal marginal tax rates.
It’s important to note that undistributed income is taxed at the highest marginal tax rate, so it’s important to distribute the trust’s income before the end of the financial year.
Provide Income Without Transferring Assets
As mentioned above, a family trust will allow you to provide income to family members at a reduced tax rate. What this also means is that a family trust allows you to maintain control of your assets instead of transferring them to members of your family group.
You may not want to transfer assets until your death or you may want to control exactly how assets are managed indefinitely. Whatever your reasons, a family trust allows you to keep assets in control of the trustee while still passing on income to beneficiaries.
A family trust is beneficial only to those included in the family group. If you distribute income to individuals considered outside of the family group, they will be taxed at the maximum rate possible.
This is why it is very important to seek legal counsel when establishing a family trust. A family lawyer will help make sure you clearly determine who qualifies as a beneficiary of the family trust in the terms of your trust deed. Then you can be confident that you only distribute assets from the family trust in a way that is beneficial to you and the family members who receive them.
The advice outlined in this article should be considered as general in nature, and you should absolutely seek legal counsel before establishing a family trust. A family lawyer will be able to go into much greater detail about the benefits of a family trust and help you determine whether a family trust is the right choice for you and your family.