Family trusts are increasingly being used for retirement planning purposes since the government’s changes to superannuation, but must still be regularly updated to work with changes to the law and family circumstances.
The limitations around super concessional and non-concessional contributions plus the cap on tax-free pension amounts, transition-to-retirement income streams no longer being tax-free and constraints on limited recourse borrowing arrangements all impact on SMSFs and super, SuperCentral superannuation and estate planning special counsel Brian Hor said.
“In comparison, family trusts are not subject to stringent legislative restrictions on issues such as requiring a sole purpose test, limits on trust membership such as who can be beneficiaries, to whom distributions can be made, conditions of release, investments, trust borrowings and transactions with related parties,” Hor noted.
“Family trusts have always been an important structure for business planning, tax planning and estate planning mainly due to their tax efficiency, asset protection flexibility and succession possibilities.
“This does not mean SMSFs are dead.”
Post 1 July 2017, the ideal retirement strategy was now a dual structure: an SMSF for tax-free income up to the transfer balance cap and a family trust for excess monies where super limits have been exhausted or there is a better outcome than the 15 per cent flat tax rate in super, he said.
“For example, a non-working spouse and two kids at university with the low-income tax offset can receive around $60,000 per year tax-free on $1.2 million invested at 5 per cent in a family trust – a saving of $9000 per annum as compared with paying 15 per cent on those earnings in a super accumulation account,” he said.
“A family trust is also useful if you need greater flexibility in terms of access to your funds and the ability to gift or lend funds as compared to super.
“However, family trusts still do need to be regularly updated for changes in the laws and in the family’s circumstances.”
He said at the very least, an existing trust deed needs to be reviewed for reasons such as the deed may be too inflexible, it may be incorrectly drafted, or it may be close to vesting.