5 pros and cons of having a family trust

grandparents with babies

This information is accurate as of 17 April 2019 and is subject to change. This is general information only for educational purposes and no one should rely on this advice alone.

Want to feel more confident about the protection of your assets?

You might want to consider starting a discretionary trust.

A discretionary trust (often colloquially called a family trust) is normally set up for the protection of a family’s assets, although some families create a trust to effectively manage their income and hold their investments.

When a trust is created, assets are placed in the care of a third party, referred to as a trustee, who manages the trust on behalf of the family’s beneficiaries. This removes the burden of individual ownership. Often, the trustee is a company controlled by individuals in the family group.

Most trust deeds have an appointor – the person who can appoint or replace the trustee. This person (or persons) play a powerful role in the safeguarding of the trust as they can replace the trustee if the trustee is not fulfilling their role.

The trustee is responsible for managing and investing the assets for the benefit of the beneficiaries; distributing the income of the trust each year; and when the trust comes to an end, distributing the capital of the trust.

There are various pros and cons to setting up a discretionary trust. In this article, we share three pros and two cons to opening a trust, plus provide some advice about starting a trust with your family.

Read on.

A few technical notes before we begin… 

  • While a trust might be called a “family trust”, a trust is only a “family trust” for taxation purposes and only if a valid family trust election has been made.
  • Family trust elections are particularly relevant where a trust makes a loss or distributes franked dividends/distributions.
  • A detailed analysis of family trust elections is outside the scope of this article.
  • This article is valid as of 17th April 2019 and is subject to change.

Pro #1: Asset protection in the event of divorce or bankruptcy 

Normally, when a person experiences divorce or bankruptcy, their assets are put at risk of loss. Assets can be seized by Order of the Court or, alternatively, by the enforcement of a Court Judgement.

A family trust can help to protect assets like money, businesses and investments among other things. A fully discretionary trust (i.e. no default beneficiaries) can stop beneficiaries and creditors barging in to split the assets in the event of divorce or bankruptcy.

In a fully discretionary trust, the trustee decides who has access to the assets and can split the trust accordingly. It is worth noting that the Family Law Courts of Australia will consider any assets owned by discretionary trusts to which a spouse is a beneficiary as a form of financial resource and can factor this into their judgements regarding the split of assets.

In the case of bankruptcy, trusts may offer some protection provided the bankrupt person is not the appointor or trustee and provided the bankrupt person has not transferred wealth to the trust with the intention to defeat creditors.

Pro #2: Reduced tax when purchasing investments 

A family trust can be used to purchase investments – and there are legitimate tax benefits for doing so.

If a trust acquires investments such as shares in listed companies or units in trusts, the income on those investments is paid to the trust who then decides who to distribute this income to in any particular year.

If the investment is held in the trust for more than twelve months, the gain on the investment is currently eligible for a 50% capital gains tax discount upon sale, provided the capital gain is distributed to an individual beneficiary.

One of the most influential reasons to open a family trust for investment ownership is protection from creditors. When investments are included in a discretionary trust, the investment technically belongs to the trust rather than the beneficiaries – so if anyone in the family goes bankrupt, creditors can’t seize the investments.

Whilst land/property/buildings can be acquired in a discretionary trust in NSW land tax will apply to all of the land value. Individuals have a threshold of land ownership which is exempt and this does not apply to discretionary trusts. Therefore personalised advice should be sought prior to planning to acquire property in a trust.

Pro #3: Perfect for retirement planning and complementing superannuation 

The aim of most working Australians is to have a comfortable retirement. Naturally, you want to enjoy the autumn years of your life! Most Australian workers build their retirement funds through superannuation – and a discretionary trust is often a perfect way to supplement these earnings.

Unlike superannuation funds, trusts have no contribution limits, no restrictions on where you can invest (unless specified by the trust deed) and no borrowing limits. You can give and take from a trust as needed, so you have increased financial flexibility throughout life.

A trust can also be useful for passing on your wealth after death. As a trust is not owned by an individual, the trust and trust assets cannot be willed by that individual therefore keeping the assets out of the estate. Control of the trustee may be able to be passed down by dealing with the ownership of the trustee company, or nominating a subsequent appointor for the trust.

This enables you to nominate who you want to manage the trust after your death and allows assets to continue in their existing structure without stamp duty and income tax complications.

Con #1: Trust losses cannot be distributed

One of the major inconveniences of a trust is how capital or revenue losses are handled. Losses cannot be distributed among beneficiaries – instead, the loss is trapped inside the trust and has to be funded with after-tax income.

For example, imagine a couple purchases an investment property and is receiving rent from tenants. However, after some time, they find out the rent being paid isn’t enough to cover interest and other costs related to the house, so the loss gets trapped inside the trust.

In order to ensure the trust has sufficient cash flow to pay expenses the family members benefiting from the trust may need to loan money to the trust.

In order to carry forward the loss and offset it against future income, the trust may need to make a family trust election to pass the loss tests which can limit potential beneficiaries in the future.

Con #2: Trusts have an expiry date

You’d think a trust would be an indefinite part of your family’s security. However, nothing lasts forever and thanks to the “rule against perpetuities”, most trusts have a shelf-life of 80 years.

This means after 80 years (or whichever date is specified in your deed), your family trust will vest and the assets will automatically be distributed among the beneficiaries. In many cases, this triggers a capital gains tax or GST event, which means significant taxation could be owed to the Federal Government.

Naturally, this has caused some anxiety for baby boomers and investors around Australia! Unfortunately, once a trust has been created, it is very difficult to change the vesting date to a date later than specified in the trust deed. Legal advice is required in this regard.

If you’re thinking about starting a trust or you’re concerned about the lifespan of your existing trust, we recommend getting in touch with a financial planner or an accountant for more advice on the issue.

There are various pros and cons to starting a family trust – so talk to a professional about your options first

A discretionary trust can be a worthwhile structure for families who want to protect and invest in their wealth. A trust can be used to protect assets like money, businesses and investment properties, plus a trust can help protect against divorce, death and bankruptcy.

However, trusts can also be complicated and have a specific shelf-life of up to 80 years, meaning the protection of family funds isn’t indefinite – even after paying administration and set-up fees!

Starting a trust has advantages and disadvantages for all families – so we recommend booking in some time to discuss options with one of our accountants.

At A Squared Advisers, we have extensive experience in structuring for wealth accumulation, so we can provide the expert advice you need to confidently start or manage a family trust.

Get in touch with the team from A Squared Advisers in Newcastle to discuss the pros and cons of starting a family trust. 


Image: Pexels

3 Need-To-Know Differences Between Accountants & Bookkeepers

So, you’re looking for someone who can manage your business’ finances.

You want someone who has professional experience recording and understanding the cash flow of the business, who can provide advice about the state of your finances, and can help make decisions that will make (or break) your business.

If this “someone” has taxation experience – even better!

So… are you looking for a bookkeeper or an accountant?

To the untrained eye, bookkeepers and accountants might seem like the same thing. Both deal with finances, both roles require at least a basic understanding of accounting, and both generate reports regarding financial transactions.

However, sometimes bookkeeping and accounting can be quite different. In this blog, we’re going to clear the air about bookkeeping and accounting, so you can make an educated decision about what level of financial management you need for your business.

#1. Bookkeepers record financial data – accountants analyse it

The big difference between a bookkeeper and an accountant is how each profession handles financial data.

Bookkeepers, for example, record, maintain and measure financial transactions within a business. Their role is to make sure your business runs smoothly; there needs to be a comprehensive record of money coming in and money going out to better understand how successful your business really is.

Enter the humble accountant, stage left.

Where bookkeepers record business transactions, accountants summarise, interpret and analyse financial data so business owners can make important decisions about their businesses, for example whether you need to scale up or downsize your staff, or whether you need to cut back on unnecessary purchases.

Essentially, bookkeepers maintain records and the payroll, whereas accountants help to understand your financial situation and help you make smart decisions about your business.

#2. Bookkeepers have an administrative role – accountants help with audits and advice

It’s time to dig down into the details.

Bookkeepers and accountants actually have very different roles. For example, bookkeepers have an administrative role – in a regular business, you might find a bookkeeper running and maintaining the payroll system, processing invoices, and reviewing your accounting systems.

Here’s an idea of what a bookkeeper’s role involves:

  • Processing invoices, receipts, payments, and other financial transactions
  • Processing and maintaining your payroll system
  • Reconciling bank accounts
  • Preparing reconciliation reports
  • Managing your accounts receivable and accounts payable

Here’s an idea of what services an accountant can offer:

  • Tax advice and planning
  • Assistance establishing a business
  • Auditing
  • Corporate reporting and compliance
  • Cash flow forecasting
  • Structuring for asset protection
  • Budgeting
  • Preparing financial statements and income tax returns

#3. Different levels of training are required to become an accountant vs a bookkeeper

There’s no arguing there are crossovers between accounting and bookkeeping.

To become a bookkeeper, you’re recommended to learn the basics of accounting and even take a few accounting courses before becoming qualified for the job. Plus, bookkeepers are expected to have a decent understanding of mathematics and have some experience in an administrative role.

To become an accountant, you must have at least a bachelor’s degree or, for a higher level of authority and expertise, you can become a public accountant.

Accountants must also meet the strict requirements of the accounting code of practice. There are three professional accounting bodies that manage accountants in Australia – the Institute of Public Accountants (IPA), CPA Australia (CPA) and Chartered Accountants Australia & New Zealand (CAANZ).

The minimum qualification for the CPA and ICAA is a bachelor’s degree in accounting. This is a starting point for further study. This ensures Australian business owners get the best possible financial advice and management possible.

What if I need a combined accounting and bookkeeping service for my small business?

Throughout this blog, we’ve highlighted the big differences between bookkeepers and accountants, from training, to roles within your business. However, it is possible for an accountant to take on both roles and provide you with all the financial support you need to successfully manage your business.

At A Squared Advisers, we’ve combined our expert accounting services with bookkeeping, so we can help businesses of all shapes and sizes throughout Newcastle & the Hunter.

Our team can help manage your finances, collect and analyse financial data, implement an outsider’s perspective to interpret this data, and provide sturdy, trustworthy advice regarding your next steps as a business owner.

Want to talk to a local accountant who speaks your language?

A Squared Advisers is one of Newcastle’s top choices for taxation and financial advice, superannuation management and retirement planning. We’ve been helping local business owners keep their finances afloat for seven years.

Get in touch with Newcastle’s top team of accountants at A Squared Advisers. We can provide trusted advice about your finances.

3 Essential Resources For Creating A Business Plan

Creating a medical practice business plan

Like all business owners, a medical practitioner needs to have a business plan before opening a practice.

In order to be successful and profitable, the practice needs to have clear goals, patient values, and an ethical set of rules to regulate the business. This includes identifying your short and long-term business strategy, plus hashing out the details regarding marketing, staffing, and patient retention plans.

Sound complicated?

We’re about to make it much simpler.

There are many ways to create a business plan for your practice, and no two plans are the same. Below are some of the best resources online for creating a realistic business plan for your practice – these can help guide you through the process of starting your own business and making it last.

#1. HealthEngine’s checklist for opening a medical practice

Looking for a quick read before heading back in to see patients?

This checklist from Australia’s HealthEngine is perfect for creating a viable business plan… and it takes a total of four minutes to read.

HealthEngine’s checklist offers guidance on how to come up with short and long-term strategies, plus pull-together details on marketing, staffing and patient retention plans. You can also learn how to get your practice up and running, then smash financial goals.

A final added bonus – HealthEngine provides advice about completing a competitor analysis to better understand the environment you’ll be practising in, along with your competitive advantage. What makes your practice different? Why would patients choose you over other competitors?

You can answer these questions and create a well-thought-out plan with this checklist.

#2. Clinic To Cloud’s guide to making a medical practice profitable

In business, being a successful, dedicated medical practitioner is not enough.

In 2018, a study on global healthcare issues outlined that, “public and private health systems have been experiencing revenue pressures, rising costs and stagnating or declining margins.”

In order to combat this tough (and getting tougher) sector, a practice owner needs to have medical expertise and business know-how. Without a harmonious blend of the two, it will be difficult to create a profitable business that meets the expectations of patients.

In this blog post from Clinic To Cloud, Michael Derin – CEO of Azure Group Accounting & a long-term corporate advisor – explains what is needed to make a medical practice profitable. To build a thriving business, practice owners need to have an actionable healthcare business plan, complete with a realistic goal and value-based care model for patients.

Learn more from Derin’s blog and start building a realistic healthcare business plan!

#3. Department of Health practitioner guidelines and resources

You can’t open a new medical practice without scouring the Department of Health. This is an absolute essential for medical practitioners hoping to succeed (or keep practicing) in medicine.

The Department of Health has countless resources for both patients and medical practitioners, including important legislation for medical practitioners and nurses, as well as guidelines for health funds, My Health Record, and Medicare.

Some notable resources include:

These resources should be used to guide your business plan and practice, as well as assist with keeping in line with the relevant legislation. Before opening a medical practice, make sure to read and print the comprehensive range of information from the Australian Government. These documents will help build a realistic business plan and ensure your practice remains ethical, profitable and legal for years to come.

Create a viable business plan with these essential resources

You can’t jump into business ownership without a well-considered plan. This is even more important for medical practitioners hoping to create a successful practice. There’s no such thing as jumping in with good intentions alone – businesses need meticulous planning, long as well as short-term goals, and a bullet-proof customer value system that will keep customers coming back for more.

Before opening a brand new medical practice, read through the resources listed above and think:

  1. What makes our practice different from all the others?
  2. What is our value proposition?
  3. Where do we want to be in six months?
  4. Where do we want to be in a year?
  5. How can we make our business profitable, while still fair?

The Australian Government Department of Industry, Innovation and Science have put together a great template and guide to get started with your business plan.

Finished creating a business plan? Get in touch with our professional team of advisers based in Toronto, Newcastle.

Image: Unsplash