If I had a dollar for every young person that has said to me, “I need to set up a trust”, I would probably have enough money for a deposit on another investment property!
Seriously, though, the problem with such a statement is that most people don’t understand why they think they need one in the first place.
Let me explain.
Tax savings not enough
For young people especially, owning property in a trust for supposed tax or “protection” benefits doesn’t necessarily make it a good idea.
Firstly, most young people – in fact, most people – aren’t employed in a profession where they are likely to be sued, such as in the medical field, and, therefore, they need to protect their assets from litigation.
In fact, age is a big factor to consider because young people generally don’t have enough wealth created to make the expense of operating a trust worthwhile.
One of the main reasons that people have a “rose-coloured glasses” view of trusts is because there can be tax concessions such as reduced land and income tax.
Also, income earned from assets held within trusts can be distributed to beneficiaries on low incomes who have reduced tax thresholds.
The thing is, unless you already own a substantial portfolio, successful business, or a brood of children, opting to own property in a trust while you’re young doesn’t make much financial sense if you ask me.
That’s because the Australian Tax Office is well aware that people sometimes use trusts to potentially reduce their tax liabilities so there a number of rules and regulations that result in high operational costs.
Over the years, the ability to distribute income to children, for example, has been tightened by the ATO so that the maximum amount that can be paid to minors tax-free is now just $416, with the remainder taxed at a staggering 45 per cent.
A time and a place for trusts
Personally, I don’t have any of my portfolio in a trust, because I am only 29, plus Sophie and I are yet to have children.
In the future, as our business and family grow, then we will likely consider trusts so that our company is legally protected but also our children can benefit from our endeavours in the years to come.
Ideally, with a multimillion-dollar portfolio, we will be able distribute income to whichever one of us stays at home with the children when they are young, which will be taxed at marginal rates because of that person’s low income.
When our children are older and perhaps at university, then they can also benefit, with the income distributed via the trust helping to support them during their studies.
Also, much further down the line, a trust can be used to protect a family’s intergenerational wealth when it comes to succession planning.
Say, for argument’s sake, our future daughter or son marries but then divorces.
Any property that is held in our family trust cannot form part of a financial settlement if one of our hypothetical children’s marriages doesn’t work out.
As you can see, though, I am talking about things that, as a young person, have yet to become a reality.
Sure, at some point in the future, when our ages start with a “three” or perhaps a “four”, then we will consider asset protection measures such as trusts.
Until then, though, I would rather spend any extra money we have on building our wealth to such a point that we need a trust – rather than just merely wanting one for reasons that most people don’t fully understand.