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Trust

Very complex when an explanation is required, a Trust is a relationship, and not a legal entity. Trusts involve trustees holding a property or asset on behalf of one beneficiary or more. As it鈥檚 not a legal entity, Trusts themselves do not as such pay tax. However, if the beneficiary receives a distribution of profit from the Trust, then they have to pay tax on that profit at their marginal tax rate.

There are many different types of Trusts, but there are two main categories: 1. A Unit Trust or Fixed Trust. 2. A Discretionary Trust or Family Trust. With Fixed Trusts there isn鈥檛 much tax planning or flexibility, as the distribution of profit has to be paid at a fixed percentage. Family Trusts are a different story altogether.

In a Family Trust, the percentage of profit distribution is under the direction of the trustee or trustees. They say who gets what, and this is where Tax Planning comes into the equation. Note: The more beneficiaries you have with a low marginal tax rate, the better it is for tax savings. You can save a lot of money, especially if you have a large family with many people over the age of 18 who pay low marginal tax rates.

For example, both primary and secondary beneficiaries can be paid up to $18,200 with a 0% tax rate if they don鈥檛 earn much money. However, some Family Trusts do not receive any tax benefit because one person is the sole beneficiary.

A trustee has the power to manage the Trust, while beneficiaries are simply 鈥榓long for the ride鈥. People who want to put their assets into a Family Trust should think carefully before going ahead, because they are putting total control into the trustee鈥檚 hands. Technically, you won鈥檛 own the property in question anymore, so there is a chance you could lose the property, or have arguments based around it.

At the same time, a Family Trust can protect your asset, as you 鈥榥o longer own it鈥. The associated level of risk management is good, as are related tax fees, but the set-up cost is quite high ($2,000 minimum). Administration of a Family Trust is very complex, because if you cannot understand every aspect of it, you won鈥檛 be able to manage it.