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Trusts and business asset protection

Trusts and business asset protection

What is a trust?

A trust structure is a tool for investors and business owners. It is an agreement or an arrangement where a person (a trustee) holds property or assets for the benefit of others (beneficiaries).

The function of a trust is to separate control and ownership. This translates to asset protection and the ability to distribute profits in a tax effective way.

What you need to know about trusts

Trusts come in all shapes and sizes. There is no “one-size-fits-all”.

The type of trust you use depends on factors, including;

  • type of asset or business,
  • financing,
  • income type,
  • industry or profession
  • marital status

Benefits of a trust

The main benefit of a trust structure is the flexibility it provides.

Within the structure of a trust;

  • income can be distributed to lower income earner/s,
  • assets are protected
  • wealth can be passed on with minimal or no tax

What does a Trustee do?

The Trustee has legal control, in legal title only.

The trustee buys and sells assets but doesn’t not own or enjoy benefits of ownership, i.e. income or usage.

A trustee’s name appears on all legal documents.

Beneficiaries

Documents don’t mention beneficiaries however they do experience the benefits of ownership i.e. usage, income, profits.

When you establish a trust of your own, you have both legal control and beneficial ownership. Most think they are one and the same.

For example, asset protection occurs because even though the legal title is in the name of Joe Bloggs, Joe is trustee for a trust and therefore doesn’t own the asset. Assets are held in trust for beneficiaries. This means nothing can be taken from Joe because he doesn’t own it.

Ownership plays a key role in  asset protection and the tax system.

What you need to know about business asset protection

Certain industries and professionals are more susceptible to litigation than others.

While CVW Accounting recommends asset protection for every business owner, we don’t recommend the following asset protection for every business.

Professionals with considerable plant and equipment or intellectual property are examples of businesses that need to consider asset protection.

For a business with a considerable value in machinery, equipment or intellectual property, these items need to be held in trust, separate from the trading entity. Below is an example.

If the professional or business is sued by an employee or a client, assets are protected because they are owned by a separate entity and used under a license agreement.

If this was to occur, the business owner could simply wind up the trading company, establish a new one and re-establish a new licence agreement, as demonstrated below:

A useful analogy is that the business is like a tree, with the main trunk being the most important part. Tree branches may fall off from time to time but the tree trunk continues to grow. All efforts and energy go into keeping the tree growing and not allowing anything to harm it. So it is with a business or investing – keep it growing and protected.

Types of trusts

When it comes to which type of trust to choose, this depends on your personal situation. You can find out more about the ‘Types of Trusts in Australia‘.

If you are interested in setting up a trust, please give us a call at CVW Accounting. We’re more than happy to help.

Resource          Flyingsolo.com.au

 

Originally published in March 2012. Reviewed and updated in February 2019 and May 2021.

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