Author Topic: Using a Discretionary Family Trust for investing  (Read 4541 times)

MsRichLife

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Using a Discretionary Family Trust for investing
« on: September 24, 2014, 10:18:16 PM »
Hi All,

Recently I decided to resurrect a dormant Discretionary Family Trust (DFT) for a couple of purposes:

a. Short term: To minimise my tax burden for the next few years before FIRE.

     I earn a significant amount and send a lot to the Tax Office each year. My DH earns much less and we have a two year old son. I want to be able to distribute income to the most suitable beneficiary so as to reduce my tax burden.

     I also have $68K worth of losses in the DFT that have been carried forward.

b. Long term: For generational wealth transfer.

    Due to my cautionary nature, I anticipate that we may have quite a significant stash in the future. I would like to think that we can treat the DFT as the Family business and as my son comes of age he can start taking on more responsibility in the management of the family wealth.

I have a few questions about what steps I should take next. Currently the DFT has no assets and $68K of losses carried forward (to be offset by future gains).

1.  In order to start investing in the DFT, I'll need to provide funds. Do I gift or loan those funds to the DFT? Pros and Cons?

2.  I'll also have to set up some accounts. Do I need a transaction account for the in/outflow of cash? If so, what attributes should I be looking for in an account of this nature?

3.  If I decide to invest in shares or term deposits or other assets, does that mean a lengthy process to set up a trading account in the name of the DTF? Is it going to be significantly more difficult than setting up accounts in my own name? Are there any other tips you can offer?

4.   What sorts of investments lend themselves to achieving my two outcomes above? Is there much difference investing as an individual compared to investing as an DFT?

Thanks in advance for ay insight you can offer.

MsRL

bigchrisb

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Re: Using a Discretionary Family Trust for investing
« Reply #1 on: September 24, 2014, 11:47:13 PM »
Hi,

I don't know if its optimal, but I can say what I use and why for my trust:

1.  Gift/loan.  I loaned funds to the trust (on the advice of my accountant).  Apparently it gives more opportunity to redraw the capital down the track without it needing to be distributed (taxable impact).  This has better taxable impacts.  Downside is less asset protection - the "loan" is an asset in your name, which is potentially fair game if someone sues you.  I went with a loan as I wanted to be able to get some dollars out to buy a PPOR in the medium term.

2. I have a transaction account set up.  I went for something with low fees - I've used one of the NAB pay as you go business accounts.  No regular fees, and 20c/transaction.  Has worked out OK for me so far.

3. I have a trading account set up for the trust.  Do you have a corporate trustee?  When I set this up, it was about the same amount of effort as setting up my personal brokerage account, except I needed to provide a JP witnessed copy of the trust deed and the trustee company constitution.  On an ongoing basis, it is an extra tax return of course.  I also found it more straightforward to use a CHESS sponsored broker (most AUS brokers) compared to IB (which holds shares in trust), as there was a more transparent audit trail if the accountant needed it.

4. Main difference in investing with the DFT is in flexibility of distribution. I'm guessing you will probably be distributing to the lower income spouse rather than a corporate beneficiary?  From my experience, investing through the trust has been mostly upside in allocating income most effectively.  Downside has been in operating costs and no capital gains discount on any cap gains in the company beneficiary.  Because of the lower impact of tax on income in the trust, I've tended to put higher yielding shares in the trust, and retained lower yield in my own name.

Question on the carried forward losses - are these actually in the trust, or were they distributed out when they were realised? I'm not an accountant, but I thought that each tax year any profit/loss from the trust needed to be distributed?  Maybe check up on that part?


MsRichLife

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Re: Using a Discretionary Family Trust for investing
« Reply #2 on: September 25, 2014, 03:26:20 AM »
I don't know if its optimal, but I can say what I use and why for my trust:

Thanks..I was hoping you'd chime in :)

1.  Gift/loan.  I loaned funds to the trust (on the advice of my accountant).  Apparently it gives more opportunity to redraw the capital down the track without it needing to be distributed (taxable impact).  This has better taxable impacts.  Downside is less asset protection - the "loan" is an asset in your name, which is potentially fair game if someone sues you.  I went with a loan as I wanted to be able to get some dollars out to buy a PPOR in the medium term.

That sounds best. I'm pretty sure that's what I did last time, which is why I still have $68K left to repay to myself. I'm not too worried about being sued, so the tax benefits and flexibility to redraw

2. I have a transaction account set up.  I went for something with low fees - I've used one of the NAB pay as you go business accounts.  No regular fees, and 20c/transaction.  Has worked out OK for me so far.

Sounds like what I need. I'll look into my options.

3. I have a trading account set up for the trust.  Do you have a corporate trustee?  When I set this up, it was about the same amount of effort as setting up my personal brokerage account, except I needed to provide a JP witnessed copy of the trust deed and the trustee company constitution.  On an ongoing basis, it is an extra tax return of course.  I also found it more straightforward to use a CHESS sponsored broker (most AUS brokers) compared to IB (which holds shares in trust), as there was a more transparent audit trail if the accountant needed it.

Yep, I have a corporate trustee. I no longer have the original trust deed though...only a copy. I hope that's not going to be a problem. :/

4. Main difference in investing with the DFT is in flexibility of distribution. I'm guessing you will probably be distributing to the lower income spouse rather than a corporate beneficiary?  From my experience, investing through the trust has been mostly upside in allocating income most effectively.  Downside has been in operating costs and no capital gains discount on any cap gains in the company beneficiary.  Because of the lower impact of tax on income in the trust, I've tended to put higher yielding shares in the trust, and retained lower yield in my own name.

OK...so it sounds like I don't need to know about any fancy investments. Just identify what I'd normally want to invest in, and then buy it in the trust.

Question on the carried forward losses - are these actually in the trust, or were they distributed out when they were realised? I'm not an accountant, but I thought that each tax year any profit/loss from the trust needed to be distributed?  Maybe check up on that part?

As I understand it, losses in the trust cannot be distributed to beneficiaries.

https://www.ato.gov.au/General/Losses/How-trusts-utilise-tax-losses/

When I sold everything after GFC and paid off my debts, $68K remained to be paid back on the loan I made to the trust. So, as I understand it, I can make $68K in profits now, pay back the loan to myself and won't incur any tax.

marty998

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Re: Using a Discretionary Family Trust for investing
« Reply #3 on: September 25, 2014, 04:16:02 AM »
Yep, cannot distribute losses. It's a problem if you have for example a negatively geared investment property in there.

Forgive me MsRich, I forgot what you mentioned your occupation was. Assume it is self-employed/business related so that you can run your 'enterprise' out of a trust instead of being an ordinary PAYG wage slave?

MsRichLife

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Re: Using a Discretionary Family Trust for investing
« Reply #4 on: September 25, 2014, 04:24:18 AM »
No, I'm still a wage slave for the moment. I'm an Aerospace engineer.

The trust is purely for investing purposes for the moment, not for running a business.

bigchrisb

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Re: Using a Discretionary Family Trust for investing
« Reply #5 on: September 25, 2014, 06:36:51 PM »
Good to know about the treatment of losses in a trust! 

So, all profits must be distributed each year, but losses must stay in the trust to offset future gains?

Assume we are talking about capital losses here?

Either way, that's a valuable tax asset you have stored away there - it would make a lot of sense to me to use it - although if you are nto actively trading it might take a long time to have that much in capital gain distributions?

MsRichLife

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Re: Using a Discretionary Family Trust for investing
« Reply #6 on: September 25, 2014, 06:50:59 PM »
So, all profits must be distributed each year, but losses must stay in the trust to offset future gains?

Yep

Assume we are talking about capital losses here?

Either way, that's a valuable tax asset you have stored away there - it would make a lot of sense to me to use it - although if you are nto actively trading it might take a long time to have that much in capital gain distributions?

Hmmm...don't know the answer to this one. I had assumed that any income I made could be used to 'pay back the loan', but I really need to check in case it does just relate to capital gains. That could make a big difference to how I need to invest.

Thanks for the questions.

MsRichLife

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Re: Using a Discretionary Family Trust for investing
« Reply #7 on: September 25, 2014, 10:48:50 PM »
BigChrisB,

I assume you use an online broker? May I ask which one you use?

bigchrisb

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Re: Using a Discretionary Family Trust for investing
« Reply #8 on: September 25, 2014, 11:04:59 PM »
I don't have a particularly good recommendation here.  I have my accounts spread over various institutions - and for buy and hold, brokerage isn't all that much of a big deal.  I did want my company/trust/super accounts to be with a different bank than my personal accounts - just in case the extreme event that one happened to go belly up!  I've ended up with NAB/nabtrade for the trust.  The offerings from the main banks are much of a muchness form what I can see, unless you go with one of the international brokers such as IB.  That was a very different kettle of fish!


MsRichLife

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Re: Using a Discretionary Family Trust for investing
« Reply #9 on: September 27, 2014, 01:35:28 AM »
Well I'm pleased to say that today I set up a NABTrade account for the Trust. I managed to do all of it online in 10 minutes! So easy compared to getting everything set up when I did it the first time 12 years ago. I love the internets.

potm

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Re: Using a Discretionary Family Trust for investing
« Reply #10 on: October 21, 2014, 06:43:26 PM »
Useful information in this thread, thanks guys.
Just going to reply so I can keep track of the thread.

MsRichLife

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Re: Using a Discretionary Family Trust for investing
« Reply #11 on: October 21, 2014, 08:36:38 PM »
Well I'm pleased to say that today I set up a NABTrade account for the Trust. I managed to do all of it online in 10 minutes! So easy compared to getting everything set up when I did it the first time 12 years ago. I love the internets.

I spoke too soon on this one. I'm still waiting for the account to be finalised. So.Much.Paperwork.