Running your business through a family trust
I was recently asked, “Should I run my business through a family trust?”
This is such a great question.
There are three really good reasons to do this, but a couple of negatives, so you need to consider this one carefully.
The Top 3 Reasons to use a family trust?
Separation of Assets.
The business would be owned by the trust, not you personally. This gives you a degree of asset protection if any claims are made against the trust. It also generally means the assets of the trust are not available for any claims made against you personally.
Privacy and protecting vulnerable family members.
Assets held in a trust are quite private and can also help protect vulnerable beneficiaries who may make unwise spending decisions, such as spendthrift, drug or gambling addictions.
Income can be distributed at the trustee’s discretion.
This may provide tax benefits as members in the family group may be on different marginal tax rates, thereby reducing the aggregate tax across the group.
However, there are also disadvantages to using a trust:
The trust cannot distribute losses.
Any losses incurred are trapped in the trust. However, they can be carried forward and used against future profits.
Difficult to retain earnings.
It's expensive for a trust to retain earnings, as any profits which are not distributed are taxed at the top marginal tax rate in the hands of the trustee. (Accountants do have a workaround for this one).
As you can see, there are a few issues here which need careful consideration. The for’s and against’s need to be thought through carefully for each situation.
Let me know if you would like to discuss how a trust might work in your situation.
Peter
