Trust, Company or Both?

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Hi,
I am almost (mortgage) debt free, and looking to better establish my financial circumstances to prepare for the future. I know that I need to talk to a lawyer and accountant. But they tend to answer either only the questions I ask, or particularly in the case of an accountant that has financial products to push, they provide answers that direct me to their products. So I first want some discussion to learn about other people’s experience.

I have a reasonable share portfolio, but capital gains and income from it are taxed at the highest marginal rate, my wife is not working due to chronic illness, we have no kids and my parents are retired. When the house is paid off (in the next 12 months), the money that has been going into repayments, can be redirected to savings and/or investment. Medium term I do hope to work for myself providing both technical and project management services.

What seems logical to me to reduce the tax is to establish a family/discretionary trust with 5 beneficiaries (M&D, wife & me & a corporate beneficiary). The corp beneficiary could also be the trustee with myself & wife as directors. This way, tax burden can be spread among the beneficiaries based on the best (discretionary) distribution. As long as I am taxed at the highest rate, wife can receive income via the trust at a lower marginal rate. Parents can be supported at a tax free rate in retirement, and if wife goes back to work, then the corporate beneficiary can receive income taxed at the corporate rate. The final kicker being that as I expand my own business working for myself (which would also be the corporate beneficiary), the income is tied into this setup but also protected through corporate asset protection.

Am I overthinking this? Is this a common setup for other people’s business and financial arrangements? Other thoughts on a tax minimisation strategy?

Cheers,
Dash

[Paul – FS Concierge]

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Hi And Welcome to Flying Solo [USER=116986]@Dashboard[/USER] . It is great to have you!

Thank you for joining our community and posting.

As you say, discussion, not advice so here goes. A company/trust structure will provide more protection if you get sued but you still will not be risk free. It will cost more annually. A major tax benefit of a company is that you can retain earnings in the company if you have a huge year, paying the corporate rate and disburse those earnings in slow years.

A trust is simpler, less costly, offers less protection and there are less complicated accounting rules to follow. [Edit to remove ambiguous comment]

Cheers

[Dashboard]

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Paul – FS Concierge, post: 268446, member: 78928 wrote:

Pro tip – you can’t establish a Trust just to minimise tax….

Cheers

Thanks Paul, Can you explain this comment a little further?

H&R Block’s site says of trusts, “They are generally created to hold a family’s assets and/or business so as to protect those assets and to facilitate tax planning for family members.”

are “facilitating tax planning” and “minimising tax” different things?

[Paul – FS Concierge]

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Discussion, not advice…. but I withdraw that comment to make things much simpler and it was poorly worded. Moving on.

[James Millar]

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Dashboard, post: 268445, member: 116986 wrote:

Hi,
I am almost (mortgage) debt free, and looking to better establish my financial circumstances to prepare for the future. I know that I need to talk to a lawyer and accountant. But they tend to answer either only the questions I ask, or particularly in the case of an accountant that has financial products to push, they provide answers that direct me to their products. So I first want some discussion to learn about other people’s experience.

I have a reasonable share portfolio, but capital gains and income from it are taxed at the highest marginal rate, my wife is not working due to chronic illness, we have no kids and my parents are retired. When the house is paid off (in the next 12 months), the money that has been going into repayments, can be redirected to savings and/or investment. Medium term I do hope to work for myself providing both technical and project management services.

What seems logical to me to reduce the tax is to establish a family/discretionary trust with 5 beneficiaries (M&D, wife & me & a corporate beneficiary). The corp beneficiary could also be the trustee with myself & wife as directors. This way, tax burden can be spread among the beneficiaries based on the best (discretionary) distribution. As long as I am taxed at the highest rate, wife can receive income via the trust at a lower marginal rate. Parents can be supported at a tax free rate in retirement, and if wife goes back to work, then the corporate beneficiary can receive income taxed at the corporate rate. The final kicker being that as I expand my own business working for myself (which would also be the corporate beneficiary), the income is tied into this setup but also protected through corporate asset protection.

Am I overthinking this? Is this a common setup for other people’s business and financial arrangements? Other thoughts on a tax minimisation strategy?

Cheers,
Dash

If your accountant starts selling you financial products or investments when you need tax planning advice then you should change accountants. In my view that is a completely dysfunctional advisory relationship and will not serve your needs. The fact that you have been driven to a forum to seek answers to complex tax strategy speaks volumes for the level of support and engagement that you are getting. Wealth management / financial planning / insurance are a different function (yes sometimes performed within one large firm but they should be separated from your accounting / tax advisers as they are different solutions and not for everyone).

Some high level feedback
1. Fix your adviser relationship as the current one is broken. FYI H&R Block are not the best solution for this situation so you need to prepare yourself to pay higher fees for expert advice. With all of these entities in place – if you can’t get passed the prospect of spending thousands each year then ignore all of my advice and unfortunately accept substandard outcomes.

2. These are not issues that a layperson should be trying to resolve by themselves and the above plan has not considered ALL of the issues and options.

You have what I like to call “good” problems to solve (high tax means high income and wealth) but you can’t solve them yourself or via a forum.

All the best
.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[bb1]

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I know you want a discussion, but blimey it is obvious that some of that ”discussion” is already leading you up the garden path, and that what happens when you let non accountants in on the discussion, or go looking up websites, so you are trying to tailor advise to suit what you think the website is saying to suit you, rather then what it is really saying.

Listen to what [USER=5318]@JamesMillar[/USER] said and sack your current accountant, stop taking advise from HR Block websites, stop taking advise from a forum where people think they know but have no idea, pay some dollars (pay a lot even) and go and spend time with a good accountant who will sit with you ask 226 questions about your current situation, if they only ask 225 walk out and find a better one.

Sounds like you have sufficient funds, don’t make a mistake.

[James Millar]

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I think the heart of the problem is that there are too many accountants that simply don’t care / can’t deliver the standard that people need (and are often paying for). It’s the same problem that plagues every profession and trade where say the top 20% really care about client / customer outcomes and the remaining 80% simply don’t care and can’t deliver.

As a career practitioner that aspires fo high standards there is nothing more frustrating than hearing these stories. THE WORST PART is to see the client just accept that poor service and stick with it. There is no other industry I have encountered where the service can be so ordinary year in year out and yet people return simply accepting the status quo.

As Bert said. If you meet with a prospective accountant and they try and sell you anything then walk away. If they ask lots of questions, they listen to your story, they go away and revert back with some form of professional proposal to address the issues with clearly articulated fees that are not negotiable – that is what you should be looking for. Don’t be scared to spend some time talking to them and learning about their style because what you really need to figure out is – above all else – Do they genuinely care about their clients and their job? It’s the care factor that makes all the difference. Same with lawyer, builder, doctor, landscaper.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[bb1]

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JamesMillar, post: 268465, member: 5318 wrote:

There is no other industry I have encountered where the service can be so ordinary year in year out and yet people return simply accepting the status quo.

Sadly [USER=5318]@JamesMillar[/USER] it doesnt happen often, but I need to disagree with you on this one, I have seen it in many industries, including my own, I know I have taken over new properties, and the people have expressed their concern about the previous service they were receiving, but it all came down to they couldn’t be bothered looking for someone new, but simply put up with what have. Mostly only looking because the previous incumbent stopped their business or simply went missing in action.

[James Millar]

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bb1, post: 268466, member: 53375 wrote:

Sadly [USER=5318]@JamesMillar[/USER] it doesnt happen often, but I need to disagree with you on this one, I have seen it in many industries, including my own, I know I have taken over new properties, and the people have expressed their concern about the previous service they were receiving, but it all came down to they couldn’t be bothered looking for someone new, but simply put up with what have. Mostly only looking because the previous incumbent stopped their business or simply went missing in action.

Well I’m not greatly surprised to hear this but of course the one I am best equipped to judge is the accounting and taxation industry. It is disturbing that people accept what are sometimes clearly sub standard outcomes but I suspect in time they will become less and less as transparency improves.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[Dashboard]

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Thanks Paul & James for your constructive feedback.

I actually moved to doing my own tax because of a bad relationship with an accountant back in years where income was tighter, and looking back have regretted that. So, sacking the accountant is actually more like finding one I can work with.

I am actually looking for a reliable accountant who can support me in the manner I wish to engage (no need to read too much into that, but what I really mean is that I recently found a conveyancer who was capable of handling all of our interactions except the signing via the phone and online when I was out of the country, and it was a level of service I’ve not experienced before or since), maybe for others that’s a normal expectation, but was new for me.

So, to be honest, I think I came here looking to advance my knowledge to arm me with the right tools for an accountant and lawyer discussion for something that as you have pointed out will cost a lot, and be with me for years, or a lifetime if setup correctly.

H&R Block was handily available, rather than where I go to for advice. Alas forums allow and encourage too much tea leaf reading and I shouldn’t have mentioned it.

James, I will double down on looking for an accountant who is honest and open, part of what was driving me here was not being able to find that yet. I probably need more friends who don’t do their own tax.

Paul, thanks for the comments RE Company vs Trust, that was the kind of discussion I was looking for, and it is helpful.
Dash

[Paul – FS Concierge]

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[USER=5318]@JamesMillar[/USER] is an Accountant – a good Accountant

[James Millar]

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Dashboard, post: 268479, member: 116986 wrote:

Thanks Paul & James for your constructive feedback.

I actually moved to doing my own tax because of a bad relationship with an accountant back in years where income was tighter, and looking back have regretted that. So, sacking the accountant is actually more like finding one I can work with.

I am actually looking for a reliable accountant who can support me in the manner I wish to engage (no need to read too much into that, but what I really mean is that I recently found a conveyancer who was capable of handling all of our interactions except the signing via the phone and online when I was out of the country, and it was a level of service I’ve not experienced before or since), maybe for others that’s a normal expectation, but was new for me.

So, to be honest, I think I came here looking to advance my knowledge to arm me with the right tools for an accountant and lawyer discussion for something that as you have pointed out will cost a lot, and be with me for years, or a lifetime if setup correctly.

H&R Block was handily available, rather than where I go to for advice. Alas forums allow and encourage too much tea leaf reading and I shouldn’t have mentioned it.

James, I will double down on looking for an accountant who is honest and open, part of what was driving me here was not being able to find that yet. I probably need more friends who don’t do their own tax.

Paul, thanks for the comments RE Company vs Trust, that was the kind of discussion I was looking for, and it is helpful.
Dash

No problem Dash. If it was a case of individual tax for someone with simple affairs (employment etc) then DIY tax often makes sense. However, when it comes to business or investments entities (including retirement tax planning and potential very effective use of SMSF’s) then I absolutely think people need a high quality adviser.

I wish there was a simple way for you to evaluate the quality, expertise, capability of a potential accountant but unfortunately I don’t think there is a simple method. That’s why I think it comes back to “care factor”. In some respects you are probably better off with a B grade technical accountant (maybe B+) that genuinely cares about doing a good job for you as opposed to an A grade that is technically the most capable but doesn’t really care to solve your specific problems. The “care factor” can possibly overcome many things.

Find a way of determining if they “care” about what they do. If you get the sense they enjoy their job of solving clients tax and accounting problems then that is a very good start.

Above all – never accept poor engagement or poor expertise (even if its cheap). Best of luck

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[James Millar]

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Paul – FS Concierge, post: 268480, member: 78928 wrote:

[USER=5318]@JamesMillar[/USER] is an Accountant – a good Accountant

Thanks Paul always happy to offer pointers

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

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