WARNING - A Trust is far Superior to a Company



In most situations a Trust is far superior to a Company for running your business under - no matter what your Accountant says. If your professional adviser tells you otherwise he or she is wrong.

A trust is simply an obligation binding a person (known as the Trustee) to deal with property over which he or she has control (the Trust property) on the terms on which he or she was given it for the benefit of the beneficiaries.

The requirements of a Valid Trust are that there must be property capable of being the subject for of the Trust; and a Trustee who has control of the Trust property and who is under a clearly defined obligation to deal with it for the benefit of beneficiaries.

There is considerable tax saving with a trust. If the trustee chooses to distribute some or all of the trust income to the beneficiaries this is taxed at the beneficiaries own tax rate. The main tax advantage of the trust is that it allows tax to be saved by splitting income off to individuals who pay lower rates of tax, than the original recipients.

In NZ, the proper and legal use of trust arrangements still remains one of the best avenues for minimising a taxpayer’s tax. In a discretionary trust the distribution of income is at the “discretion” of the trustee. This is a powerful tool for allocating income to obtain the maximum tax advantage. It is important to note that a “tax loss” cannot be distributed as in a partnership.

Advantages of Trusts
A family trust can:

  1. Save Income Tax by its unique income splitting ability
  2. Save Estate Duty (if reintroduced in the future)
  3. Provide a good defence for your family against creditors
  4. Provide a protection for your family against outsiders getting their hands on family assets
  5. Protect you against legislation which endeavours to rewrite your will after you die and that distributes your estate if you die without a will or a complete will
  6. Avoid the problems of probate
  7. Allow you to manage your family assets as you think fit
  8. Provides secrecy because they are not a matter of public record
  9. Saves Administration costs
  10. It can, if properly drafted, be unwound more easily than other business devices.

What are the Disadvantages?

  1. You may still pay some tax
  2. Provisions relating to minor beneficiaries require careful management as special rules apply now
  3. The need for expert drafting. Without this, advantages “a” to “j” will not arise. This is definitely not an area for the home handy person or the over enthusiastic legal novice.
  4. Expense in setting up: It can cost a sizeable amount ($1000 and up) to set up a trust. This is once only cost however.

Summary

Many business owners are under the impression that a company set up was the best structure for their business. Apart from the odd situation where this is the case, that advice is not correct and business owners need to know why. If you are one of those with a company and you weren’t aware that a Trust was far better, email us with your query and we will send you the facts backed by one of the most prestigious professional bodies in this country. Most Accountants are aware of this difference but sadly there are many other advisers who do not know and they are providing false recommendations to their clients.

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