Asset Protection
Asset protection is important for three reasons: Firstly to save tax, secondly to pass on wealth to the next generation and thirdly to protect your assets from outside threats (such as litigation, relationship breakdown, death and illness).
Asset Protection for Tax Minimisation
The best form of Asset Protection for Tax Minimisation is through trusts. The trusts should own your assets so that it can distribute its income among the beneficiaries. The person controlling the trust (the trustee) can distribute the income from the trust as they see fit. It is usually better to have a corporate trustee rather than a natural person.
For Example:
Richard owns 3 houses through the Richard Family Trust. At the end of the financial year Richard has made a profit on his Real Estate Investment. Richard is a full time employee and has a high personal income tax rate. Richard’s wife Jan does not work thus she still has her tax free threshold and a low income tax rate. The Trustee of the Richard Family Trust could choose to distribute the income to Jan, utilising her tax free threshold and low income tax rate.
As well as being able to distribute to people as beneficiaries, trusts are able to distribute to companies. Currently in Australia, companies have a tax rate of 30% which can be lower than the marginal tax rate for high income earners.
It’s also important to note that there are different types of trusts for asset protection such as discretionary trusts, unit trusts and hybrid trusts. You should seek professional advice to determine which type of trust (if any) is best for your particular circumstances.
Asset Protection for Wealth Distribution
Planning for the distribution of your wealth to the next generation upon your death is extremely important. Without a will upon your death the courts control the distribution of your wealth. More importantly, if your assets are held by companies and trusts, then succession planning is pivotal. Succession planning is planning a natural path way for the next generation to take over the running of your trusts and companies. To minimise taxation and to ensure the success of your wealth over the long-term, adequate succession planning is needed.
Asset Protection against Outside Threats
Outside threats include litigation, relationship breakdowns, death and illness. By ensuring that your assets are held by trusts and companies, you can limit litigation and liability from your own actions. The strongest form of asset protection is through using a trust and having a corporate trustee. This is because a corporate trustee has a board of directors and directors can be replaced quickly. For example, if you were to fall ill suddenly, the board can continue to function.
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