When managing wealth or structuring a business in Australia, using trusts to hold company shares is a strategy that offers both advantages and potential pitfalls. Trusts are a popular choice for families and businesses seeking to manage their assets, distribute income efficiently, and protect their wealth. While a trust cannot directly own shares, the trustee acts as the legal owner on behalf of the trust, indicating the trust as the beneficial owner when registering shares.
In this blog, we will explore the benefits and drawbacks of using trusts to hold company shares, providing insights to help you make an informed decision.
What Is a Trust?
Before diving into the pros and cons, it’s essential to understand what a trust is and how it functions in the context of holding company shares.
A trust is a legal arrangement where one party, known as the trustee, holds and manages assets on behalf of another party or parties, known as the beneficiaries. The terms of the trust are outlined in a trust deed, which dictates how the assets are to be managed and distributed. Trusts are commonly used in Australia for estate planning, asset protection, and tax management. If there are joint trustees, all trustees must be listed as joint owners of the shares to clearly indicate their shared responsibility and role.
When a trust holds company shares, it is the trust itself—not the individual beneficiaries—that legally owns the shares. The trustee manages these shares according to the terms of the trust deed, with the aim of benefiting the beneficiaries. A discretionary trust allows for flexibility in income distribution and control over capital gains tax, which can lead to significant financial savings.
Benefits of Using Trusts to Hold Company Shares
1. Asset Protection
One of the most significant advantages of using a trust to hold company shares is the protection of personal assets. Trusts can shield assets from creditors, legal disputes, and other financial risks. This protection is particularly valuable for business owners and high-net-worth individuals who want to ensure their wealth is safeguarded for future generations.
- Protection from Creditors: If a company faces financial difficulties, the shares held in a trust are generally not accessible to the company’s creditors, as the trust is a separate legal entity.
- Family Law Protection: In family law disputes, assets held in a trust may be protected from being divided as part of a divorce settlement, depending on how the trust is structured.
2. Tax Efficiency and Tax Advantages
Trusts offer flexibility in distributing income and can be used to minimise tax liabilities. By distributing income to beneficiaries in lower tax brackets, the overall tax burden can be reduced. Companies in Australia pay tax at varying corporate tax rates, and there are potential tax concessions and incentives available, particularly for small businesses engaging in certain activities.
- Income Splitting: Trusts allow income splitting, where income generated by the shares can be distributed to beneficiaries who pay lower rates of tax. This can be particularly beneficial in families where children or other dependents are beneficiaries.
- Capital Gains Tax (CGT) Management: When a trust sells company shares, it may be able to access the 50% CGT discount if the shares have been held for more than 12 months, provided the beneficiaries are eligible.
3. Estate Planning Flexibility
Trusts provide a flexible way to manage the distribution of assets after the death of the company owner. They can be tailored to meet specific family needs and ensure that assets are distributed according to the settlor’s wishes. A discretionary trust can provide flexibility in income distribution and control over capital gains tax, leading to significant financial savings.
- Control Over Distribution: The trust deed can specify how and when the shares and any income generated from them are distributed to beneficiaries, allowing for control over the timing and conditions of inheritance.
- Avoiding Probate: Assets held in a trust do not need to go through probate, which can speed up the distribution process and maintain privacy.
4. Continuity and Succession Planning
Using a trust to hold company shares can ensure continuity of ownership and management, even after the death or incapacity of the original owner. This is particularly important for family-owned businesses.
- Smooth Transition: A trust can provide a seamless transition of company shares to the next generation or other chosen successors without the need for complex legal processes.
- Preserving Family Wealth: By keeping company shares within a trust, families can ensure that the business remains under their control and that wealth is preserved across generations. This approach allows family members to benefit from the business’s financial structure, optimising tax benefits and ensuring business continuity.
Drawbacks of Using Trusts to Hold Company Shares
While the benefits of using trusts to hold company shares are significant, there are also some drawbacks to consider. It is important to maintain privacy in ownership details when shares are held in a trust, as this prevents public disclosure of confidential information, such as identities of beneficiaries.
1. Complexity and Cost
Establishing and maintaining a trust to hold company shares can be complex and expensive. The process involves legal fees, ongoing administrative costs, and compliance with Australian tax and legal regulations.
- Legal and Accounting Fees: Setting up a trust requires legal advice and the drafting of a trust deed, which can be costly. Additionally, ongoing management of the trust may require regular consultations with accountants and lawyers.
- Administrative Burden: Trustees have legal responsibilities, including record-keeping, reporting, and ensuring compliance with the terms of the trust deed. This can be time-consuming and may require professional assistance.
2. Loss of Direct Control
When company shares are held in a trust, the original owner (settlor) may lose some degree of direct control over the shares. Although a trust itself cannot be a shareholder, the trustee is appointed as the legal owner of the shares on behalf of the trust, thus creating a framework for share management and tax implications related to shareholder status. The trustee is legally responsible for managing the shares in the best interests of the beneficiaries, which may not always align with the settlor’s wishes.
- Trustee Discretion: The trustee has discretion over the management of the trust assets, which means the settlor may have limited say in how the shares are managed or distributed.
- Potential Conflicts: Disagreements between the trustee and beneficiaries can arise, particularly if the beneficiaries have different views on how the shares should be managed or distributed.
3. Tax Implications
While trusts can offer tax advantages, they also come with potential tax risks and complexities. The tax treatment of trusts in Australia is subject to specific rules and can vary depending on how the trust is structured.
- High Tax Rates for Undistributed Income: If income generated by the shares is not distributed to beneficiaries, it may be taxed at the highest marginal tax rate in the trust.
- Division 7A Issues: If the company is a private company, holding shares in a trust can trigger Division 7A issues, leading to deemed dividends and additional tax liabilities.
4. Inflexibility in Some Situations
While trusts offer flexibility in estate planning, they can be inflexible in other ways. Once a trust is established, making changes can be difficult, particularly if the trust deed does not allow for amendments.
- Irrevocability: Many trusts are irrevocable, meaning that once the trust is established, the settlor cannot change the terms or dissolve the trust without the agreement of the beneficiaries and trustee.
- Challenges in Accessing Capital: Beneficiaries may face restrictions on accessing the capital held in the trust, which can be problematic if they need funds for personal or business reasons.
Making the Right Choice for Your Situation
Deciding whether to use a trust to hold company shares requires careful consideration of your specific circumstances, goals, and the potential benefits and drawbacks. It’s essential to seek professional advice to ensure that this strategy aligns with your financial and legal objectives.
Factors to Consider
- Family Dynamics: Consider the needs and dynamics of your family, including potential conflicts between beneficiaries and the desire to maintain control over the business.
- Tax Planning: Evaluate the potential tax benefits and risks associated with using a trust, particularly in the context of your overall tax strategy.
- Legal and Administrative Costs: Assess whether the costs and complexities of establishing and maintaining a trust are justified by the potential benefits.
- Long-Term Goals: Think about your long-term goals for the business and family wealth, including succession planning and asset protection.
How Grey Space Advisory Can Help
Navigating the complexities of trusts and company shares in Australia requires expert guidance. Grey Space Advisory offers comprehensive services to help you make informed decisions about using trusts to hold company shares. Our team of experienced advisors can provide tailored advice to ensure that your trust structure aligns with your financial goals, minimises tax liabilities, and protects your assets.
If you’re considering using a trust to hold company shares or need advice on the best structure for your business and family, contact Grey Space Advisory. Our experts are here to guide you through the process and help you make the right decisions for your financial future. Reach out to us today to learn more about how we can support your success.
FAQs
Is it better to hold company shares in a trust or personally?
Holding company shares in a trust can offer asset protection and tax benefits, but it also involves complexity and costs. It’s essential to weigh the pros and cons and seek professional advice.
Can I change the terms of a trust after it’s established?
It depends on the terms of the trust deed. Some trusts allow for amendments, while others are irrevocable. Consulting with a legal expert is recommended.
What are the tax implications of holding company shares in a trust?
Trusts can offer tax efficiency, particularly through income splitting, but they also come with potential risks, such as high tax rates on undistributed income. Professional advice is essential for effective tax planning.
