New profit centre for Accountants and Financial Advisers: Setting up a business structure

New profit centre for Accountants and Financial Advisers: Setting up a business structure

This week is you setting up business structures for your clients. We have seen a 400% increase in Family Trusts and Unit Trusts being built on our website over the last 12 months. Baby boomers are refusing to retire and are instead starting new businesses. People being retrenched are refusing to go on the dole and are instead opting to start up a new business. Either way building business structures is a huge growth area.

I have prepared for you an email to send to your clients showing your expertise. Tell your clients you can build their business structures.

Keep control. Protect your clients.

Send this email below to your clients.

Dear client,

Our practice specialises in business structuring.
We are going to look at the most common way to structure two types of businesses:

1. Mum & Dad business – Family Trust with a company as Trustee

A Family Trust is set up to hold your business it:

  • reduces tax (you use beneficiaries on low marginal tax rates)
  • reduces CGT by 50% and may qualify for the small business CGT relief
  • keeps control within the family
  • provides asset protection if the business goes broke

Here is a story about Charles and Mei Lin…

Charles and Mei Lin control (through a Family Trust) a corner deli. They give themselves annual wages of $170,000 each. At the end of the year, <> tells them the good news. On top of their salaries they made an additional $90,000 in profit.
What happens if Charles and Mei Lin took this additional income? They would pay almost half of it in tax – not much fun for all that hard work.
Because they are in a Family Trust, they distribute the ‘extra’ $90,000 to their 18-year-old son at high school and daughter at university. Obviously, their children get none of the money. They merely sign a Deed of Debt Forgiveness at the end of each year.

Trustee v’s Appointor

Trustee (puppet) – the Trustee is a company. The business assets are in the trustee’s name. But, the trustee is the owner in name only. The trustee is not the ‘beneficial’ owner.
Appointor (god) – hires and fires the Trustee. Therefore, people often call the Appointor ‘god’. The Trustee is often called a ‘puppet’. The power to appoint and dismiss the trustee is given to the Appointor. Mum and Dad are often the Appointor. Upon their death then their children are usually the Appointors.

Who are the beneficiaries?

Who gets the Family Trust income each year? This is up to the Trustee (acting under the advice of the Appointor). Beneficiaries have no right to ask for any money. Therefore, the class of beneficiaries is as wide as possible – including distant relatives.

What happens if the Family Trust goes broke?

The Company as trustee of the Family Trust usually goes down with the sicking ship. However, the beneficiaries and Appointor are protected. Should the family business find itself in difficulty with creditors, provided you have followed the advice from your <>, it is likely that the only assets that can be called upon to pay these debts are those owned by the Family Trust and the Trustee.

Of course, if you are forced to give a guarantee for the Family Trust, then you can lose everything. If that upsets you, then don’t sign guarantees.

Practice Hint
Mum and dad were directors of their Family Trust corporate trustee. The bank required mum and dad to both be guarantors. The <> cleverly removed mum as a director. The very same bank, for the same loan, now only required dad as a guarantor.

Can Family Trusts avoid the death taxes: Capital Gains Tax & Stamp Duty?

Family Trusts reduce de facto death taxes because case law has held that the rights of beneficiaries in Family Trusts don’t constitute an ‘interest’ in your Will. Interestingly, the assets of a Family Trust do not form part of a deceased estate. A person could have millions in their Family Trust and yet die a pauper.
The only exception to this is ‘Loan Accounts’ or ‘Unpaid Present Entitlements’. These are monies that someone has ‘loaned’ to the Family Trust. This asset belongs to the person making the loan.

2. Two of more families? Get a Unit Trust with a company as Trustee

A Family Trust is only useful for a single family – and then pretty much just a mum and dad. If you bring in other business partners or children then consider a Unit Trust. The Unit Trust has a company as its trustee.

Each business owner gets Units in the Unit Trust. At the end of each year, income is distributed to the Unit Holders in proportion to the units that the beneficiary holds. The Trustee has no discretion.
For example, if you get have 50 units out of 150 units then you get 1/3rd of the profits each year.
The Units are usually held by their respective Family Trusts.

What happens if the Unit Trust goes broke?

Unfortunately, unit holders can be liable to pay any shortfall of assets on the Unit Trust going broke, especially if the trust is not properly drafted and maintained.

The law firm that we use ensures that the Unit Holders are not liable for any Unit Trust deed.

Cashing in and transferring of units

The ownership of the trust funds is divided into a number of equal units. The units are recorded on a register. They are transferable like shares in a company.

Well-constructed Unit Trusts include mechanisms for cashing in (redemption) and transferring the units. Of importance is the procedure for determining the price at which units are to be redeemed.

Units in the Unit Trust can be readily traded and people holding them can participate in the profits of the business on a set percentage.

What do you consider when setting up a unit trust?

When setting up a Unit Trust consider:

  • the control of the trustee company, the method of arriving at decisions (e.g. whether unanimity should be required in certain cases) and the method of removing the trustee and appointing a new trustee (the fact that two or more unrelated parties may be associated in the operation of a unit trust and the fact that the unit trust, unlike a discretionary trust, will normally be under the control of more than one person, increases the risk of disputes as to the management of the trust assets and the construction of the relevant documents)
  • the powers of the trustee to determine whether receipts, receivables, outgoings and other charges are on income or capital account
  • the control exercised by unit holders over the activities of the trustee
  • how units are transferred. Should they be offered to the other Unit Holders first?
  • how you introduce new Unit Holders into your business
  • the means of excluding a unit holder when a key person dies or can’t work in the business anymore
  • protecting Unit Holders from personal liability

If you or your family are thinking about setting up a business talk to us first.

Kind regards,

Your Name

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