Frequently Asked Questions about Trusts

Introduction

Trusts generally give the opportunity for the use and control of assets to be separated from the ownership of such assets. This is achieved by the person who sets up the trust "the settlor " transferring the property to the trustee of the trust. Most modern trust deeds provide for a power of appointment of new trustees, and this aspect must be carefully considered in each case for continuity purposes. There are a number of valid reasons for the creation of personal asset plans utilising a discretionary trust. They include:

• Minimisation of income tax levels;
• Protection of family assets in the context of matrimonial claims or claims by creditors;
• Income splitting;
• Superannuation surchages;
• Social Welfare subsidies;
• Living wills - which includes asset protection for children and grandchildren and protecting against a High Court's ability to rewrite a testator's will;
• Means testing;
• Possible introduction of capital gains tax;
• Protection against rest home subsidies;
• Allowing a testator to leave his or her estate, or specific gifts to a trust as beneficiary;
• The protection of capital from being wasted by irresponsible beneficiaries;
• Creating a flexible device to take account of the differing needs of beneficiaries pursuant to the Trust.

Income Splitting

If a trust is established whereby the settlor alienates the asset producing income for the trust then the income can be applied to the beneficiaries so that it becomes their income. However, it must be noted that in a simple trust arrangement any income from assets settled by the settlor can be treated for tax purposes as a settlor's income if there has not been suficient alienation to satisfy the Inland Revenue Department.

With a trustee allocating income to an infant beneficiary the income tax payable in the hands of the infant beneficiary would be at the currentreduced rate of 19.5%. Thus, there is a saving if the original settlor has been paying tax at the top rate of 39%. However, it must be remembered that the income applied to the beneficiary belongs to that beneficiary. Provided identifiable expenses such as the maintenance, advancement, benefit and education of an infant beneficiary are identified there should be no problem in allocating funds to the beneficiary and paying tax at the lower rate.