A Guide to Protecting Your Assets and Securing Your Legacy
There comes a time in life when we start thinking about the wealth we have or plan to accumulate over the years and seek out smart ways to manage it. If you're at this stage, you're in the right place. We're here to guide you on fortifying your financial future and protecting your hard-earned assets for future generations.
In Australia, there are various sophisticated structures available to protect your wealth, optimise tax outcomes, and plan your estate effectively. Family/Discretionary Trusts offer flexibility in income distribution and asset protection, while Bloodline/Family Safe Trusts are specialised ways of protecting assets for your lineage. Not For Profit Foundations and Registered Charitable Organisations support charitable causes and provide tax advantages. Understanding these options is crucial for securing your financial legacy and achieving your long-term financial goals.
But firstly, why should you consider these advanced asset protection and estate planning strategies?
Asset Protection: These structures protect your wealth from risks like lawsuits, creditors, and divorce settlements. By separating assets from personal ownership, you can ensure your wealth remains intact and secure for you and your beneficiaries.
Tax Optimisation: Many of these structures offer opportunities for tax minimization and optimisation. By strategically distributing income and assets, you can reduce your overall tax burden and take advantage of tax concessions and exemptions.
Estate Planning: These strategies are essential for effective estate planning. They allow you to specify exactly how you want your assets to be managed and distributed after your passing, ensuring your wishes are carried out and minimising potential disputes and disagreements among your beneficiaries.
Generational Wealth Transfer: These structures help you create a framework for transferring wealth to future generations, preserving family wealth and providing financial security for those that come after you.
Philanthropy: Not For Profit Foundations and Registered Charitable Organisations allow you to support charitable causes and make a positive impact on society. They provide a structured approach to philanthropy and can leave a lasting legacy.
By utilising these protective structures, you can protect your wealth, minimise tax liabilities, and ensure your assets are distributed according to your wishes, benefiting yourself, your family, and your community.
Before we start, let’s talk about what a trust is —
Trusts are simply agreements between one person (or company) who is agreeing to hold an asset and a person or people who is benefiting off of that agreement. The person (or company) who controls the asset is called the ‘trustee’ and the ones that are benefiting off of the trust are the ‘beneficiaries’. The person who is in charge of creating the trust will set out specific terms on how the assets will be managed. That information will then go into a document called the ‘trust deed’.
So, let's delve into the first one, Family/Discretionary Trusts —
Family trusts, also known as discretionary trusts, are a pretty common choice for asset protection and estate planning. They are set up by something called a ‘trust deed’. The deed will lay out the terms and conditions for the trust and is signed by the settlor (creator) and the trustee’s. Then, the trustees are responsible for the management of the assets and the trust itself.
These trusts offer flexibility in income distribution, with beneficiaries being individuals, families, or entities. Income and assets are distributed at the discretion of the trustee, providing asset protection by separating trust assets from personal assets.
The tax benefits of family trusts include the ability to distribute income to beneficiaries in lower tax brackets, potential tax minimisation through franking credits and capital gains tax discounts, and flexibility to distribute capital gains and losses among beneficiaries. Estate planning benefits include facilitating the smooth transfer of assets to beneficiaries upon the trustee’s/main principal’s death, enabling long-term asset management and preservation for future generations, and providing a mechanism for protecting assets from legal claims and creditors.
Sounds great, right? It is. But as there are great benefits, there can also be disadvantages. One of which is set-up and maintenance costs (such as the setting up of the deed, accounting, maintaining and managing of the deed). Additionally, if there is any income earned by the trust that is not distributed, it is taxed at the top marginal tax rate and any distributions to minors are also taxed at that rate after the relevant threshold has been reached.
The second important structure is Bloodline/Family Safe Trusts —
Bloodline trusts, also known as family safe trusts, are designed to protect assets for future generations. They ensure that your wealth remains within the family bloodline and is not subject to claims from external parties, such as divorcing spouses or creditors of beneficiaries. These trusts typically include mechanisms for appointing trustees and beneficiaries, provide asset protection from creditors, divorcing spouses, and other claimants, and can restrict the distribution of assets to specific descendants.
The tax benefits of bloodline trusts are similar to family trusts, including income splitting and tax minimisation strategies, with additional tax planning opportunities specific to the trust's structure. In terms of estate planning, bloodline trusts ensure that assets remain within the family bloodline (your children and grandchildren), include provisions for managing and distributing assets over multiple generations, and enable the settlor to control the distribution of assets to descendants according to specific criteria. With a Bloodline Trust in place, the assets in the trust can only be used for your own children or grandchildren’s health, education, support, or maintenance – never for a son- or daughter-in-law during the marriage or in the case of a divorce. The trust is also revocable during your lifetime, but it will only be revoked back to you.
Next up is Not For Profit Foundations, another option for protecting your assets and supporting charitable causes —
Not-for-profit (NFP) foundations can protect assets and support charitable causes simultaneously. These foundations can be established for multiple reasons, including (but not limited to) advancing education, relieving poverty, or promoting health. While they do not distribute profits to members or owners, they can generate income and hold assets. Governed by a board of directors or trustees, NFP foundations are subject to regulations by the Australian Charities and Not-for-profits Commission (ACNC).
Tax benefits of NFP foundations include exemption from income tax on profits generated from charitable activities, eligibility to receive tax-deductible donations from individuals and businesses, and potential qualification for other tax concessions and exemptions based on the foundation's activities. In terms of estate planning, NFP foundations enable the settlor to support charitable causes, provide a structured framework for managing charitable donations and activities, and allow for the establishment of a lasting legacy reflecting the settlor's philanthropic values.
Lastly, we have Registered Charitable Organisations —
Registered charitable organisations are entities established for charitable purposes (just like NFP Foundations), such as relieving poverty, advancing education, or promoting health. They are registered with the Australian Charities and Not-for-profits Commission (ACNC), and must meet the ACNC's governance and reporting requirements. Registered charitable organisations are exempt from income tax on profits generated from charitable activities and eligible to receive tax-deductible donations from individuals and businesses.
Tax benefits of registered charitable organisations include donors being able to claim tax deductions for donations made to them, exemption from income tax on profits made from charitable activities, and potential qualification for other tax concessions and exemptions based on their activities. In terms of estate planning, registered charitable organisations provide a structured and regulated framework for managing charitable donations and activities, enable the settlor to support charitable causes and leave a lasting legacy, and ensure compliance with regulatory requirements, protecting the organisation's charitable status.
From the outside, Not For Profits (NFP) and Registered Charitable Organisations may seem super similar. They are pretty similar, but there are a few differences! The primary difference lies in their focus and tax status. While both are established for non-profit purposes, a NFP organisation's objectives may extend beyond charity, encompassing social welfare or educational initiatives. In contrast, a registered charitable organisation is exclusively dedicated to charitable causes such as relieving poverty or advancing education. Charities also must be endorsed by the Australian Taxation Office as having charitable status, which qualifies the organisation for the charity tax concessions. NFPs have the ability to qualify for a different set of tax concessions.
To wrap up, individuals and businesses in Australia have access to a range of sophisticated structures to protect their assets, optimise tax outcomes, and plan their estates effectively. Understanding these options is crucial for securing your financial future and leaving a lasting legacy. By utilising these protective structures, you can protect your wealth, minimise tax liabilities, and ensure your assets are distributed according to your specific wishes – benefiting yourself, your family, and your community. These actions are so imperative in today’s day and age, but we completely get it if it’s a bit hard to wrap your mind around. That’s why financial advisors are a great resource to utilise when you’re feeling overwhelmed with it all and have no idea which direction is the smartest for you to go down. Michaela at FRE.DM Wealth is here to help make the absolute most out of your wealth and help you through this complex process. So, give us a call or send us an email today to get started in protecting your wealth and assets!
