Family Trusts – Protecting the Family Jewels

Family discretionary trusts are the vehicle of choice for many family businesses and investors.

At the SME / Private Clients Day in Melbourne in July, Paul Hockridge, CTA, session looked at protecting the family jewels, in particular wealth, with a focus on the lessons learned from a number of non-tax cases and how that might shape our structuring.

In the introduction to the paper he presented at the event, Paul noted that it is often said that the main advantages of family trusts is that they can be used to protect assets and to reduce tax.

Perhaps, he said, we should ask, “protect assets from who” and “might we not pay more tax if we use a trust”? 

To answer the last question first, holding real estate in a family trust might expose “us” to a land tax trust surcharge.

Further, it might result in more duty payable on real property acquisitions and in capital gain tax (CGT) being payable on disposal, if any gain on disposal of say shares is distributed to a non-resident who might otherwise have been able to sell them tax free if he or she had owned them personally.

Perhaps, the message to keep in mind is that it is often worth challenging the traditional wisdom.

As for the first question, we might want to protect assets from claims by a spouse, other family members or creditors – business or otherwise. Again, this adds further layers of complexity.

So, how are family trusts controlled and how might we mitigate the risk of disputes?

Speaking to us before the event, Paul said "a risk that practitioners sometimes face is not knowing when a seemingly good structuring idea has been struck down by a court, or why."

Paul's paper looks at managing control of family trusts – understanding the formal legal mechanisms.

It then moves on to managing trust control, and establishing the groundwork, using family agreements and shareholder agreements to keep the peace.

Covering some of the circumstances the Courts will interfere with trustee decisions, Paul also looks at what remedies they will grant if they do interfere.

His paper concludes with a look at structuring trusts to avoid disputes, and key provisions to include, as well as some lessons from the Mercanti decision.

Paul's paper is available to purchase here.

Paul Hockridge CTA, is Tax Advisory Partner at Mutual Trust. He has worked for the ATO, a large law firm, has been a partner in medium and Big 4 chartered accounting firms and has over 30 years' experience in tax, asset protection, estate and succession planning.

Paul’s niches include litigation support, property development and FBT and salary packaging. Paul specialises in advising high wealth families and closely held businesses, as well as providing support for a number of accounting and law firms. Paul maintains a practicing certificate as a legal practitioner in Victoria, is a fellow of both CPA Australia and Chartered Accountants Australian and New Zealand and is senior fellow and teaches in the Masters program in the Law School at the University of Melbourne.

Paul sits on The Tax Institute’s FBT and Employment Taxes Committee, and is a contributor to the Institute’s book, Estate and Business Succession Planning. Perhaps Paul is best known as a regular presenter at local, state and national Institute conferences.

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