Trusts and business asset protection: the basics

What is a trust? How can a trust help protect your personal and business assets? As for business asset protection, is it something you need to know about? Here are the answers, delivered in a straightforward manner.

What is a Trust?

A trust structure is a tool for investors and businesses. The main benefit of a trust structure is that it provides flexibility. Income can be distributed to the lower income earner, assets can be protected and wealth can be passed onto the next generation with minimal fuss and little or no tax.

Trusts come in all shapes and sizes and there is no “one-size-fits-all” so be weary of anyone who says there is. The type of trust you use depends on many factors, including; type of asset or business, financing, income type, susceptibility to be sued and marriage status .

While it's not possible to cover every type of trust here, we will explain what a trust is. This basic understanding is often missing and therefore trusts and their usage become unnecessarily complex.

A trust is basically an agreement or promise. A person or company agrees to hold assets for the benefit of another. The one who holds the assets is called the trustee; those who benefit are called beneficiaries.

The trustee has legal control, which is legal title only. A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership, such as income or usage. It’s the trustee’s name that appears on all legal documents, bank accounts, etc.

The beneficiaries are not mentioned on such documents and have beneficial ownership, allowing a person to enjoy the benefits of ownership, including; usage, income, profits etc, even though legal title is in another name. Therefore the beneficiaries are entitled to the assets and profits of the trust.

The basic function of a trust is to separate control and ownership. The result is that asset protection is possible and profits can be distributed in the most tax effect way.

What you need to get your head around is this: when you establish a trust of your own, you have both legal control and beneficial ownership. Most people don’t separate the hats, they think they are one and the same.

For example, asset protection occurs because even though legal title is in the name of Joe Bloggs, Joe is trustee for a trust and therefore doesn’t own the asset – the assets are held in trust for the beneficial owners – hence nothing can be taken from Joe because he doesn’t own it.

Ownership plays a key factor in not just asset protection but within the tax system, too. This is why a 'player' will endeavour to own nothing and control everything!

There are many benefits to structures such as companies and trusts and they are just one way that a soloist can use trusts to his or her advantage.

What you need to know about business asset protection

It’s a sad fact that certain industries and professionals are more susceptible to litigation than others. While our firm certainly recommends asset protect for every business owner, we don’t recommend the following asset protection for every business.

Professionals such as doctors and soloists with considerable plant and equipment or, perhaps more likely, intellectual property are examples of businesses that should consider some form of asset protection.

As a note, before considering any asset protection one should have adequate insurance as a stop-gap.

With a business which has a tremendous amount of value in machinery, equipment or intellectual property, these items should be held separate from the trading entity. Below is an example.

If the professional or business is sued by either an employee or a client, the assets are protected because they are owned by a separate entity and used under a licence agreement.

In such a circumstance, all the business owner does is wind up the trading company, establish a new one and re-establish a new license agreement, as demonstrated below:

A useful analogy is that the business is like a tree, with the main trunk being the most important part. Tree branches may fall off from time to time but the tree trunk continues to grow. All efforts and energy go into keeping the tree growing and not allowing anything to harm it. So it is with a business or investing – keep it growing and protected.

As far as what type of trust should be used, that depends on your personal situation. The point to note is:

Business assets should be protected in a separate entity, especially in highly litigable industries.

Tony Melvin is the MD of Chan & Naylor Australia - the industry leader in areas of asset protection, tax minimisation & self-managed superannuation.They believe that simple, applicable education is the best method of dissemination for soloists.

5 comments | Add your own

Thank you for explaining the trust in such a concise and easy to understand mannor. My new accountant mentioned trust just 30 minutes before I read this article. It is something that I will be persuing shortly. Ronan Leonard from Melbourne
Excellent article, You made the gobble-de-goop easy to understand and comprehendible for me.
I would be interested in learning more.
Laurel Brown from Sydney, Australia
I wish that more accountants would suggest this set up. It is something that I was taught in my first accounting job some time back and it is something that I continue to do with the set up of clients to the very day. Karen Hardy from Canberra
Thank you all for your comments. Glad the article was of benefit. For your info here's some future topics on the agenda
Key Performance Indicators
What is a tax deduction and how to determine it yourself?
· Bookkeeping made easy
· Protecting goodwill
· Claim home office expenses
· Financial management – solution to BAS problems
Tony Melvin from Sydney
Concise information, but perhaps dangerously so. Care needs to be taken that control and ownership are separated, or there is effectively no asset protection. ASIC v Carey demonstrated how ineffective trusts can be unless there is a genuine distinction between trustee, appointor and beneficiaries. Strongly recommend reading this web page: http://www.findlaw.com.au/article/14912.htm
Chris Harris CFP from Sydney

5 comments | Add your own

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