hi, i a wa e bla k. i [ a la Á Çe a vd a v a ou vta vt ith a issio to...hi, i a wa e bla k. i [ a...

Hi, I a Wa e Bla k. I a la e a d a a ou ta t ith a issio to help the average Australian slash their tax and protect their wealth.

One of the greatest secrets of the rich and famous is this: they see tax

as optional. They control the process. They only pay 4-6% tax on

average (yes that is the truth!). They earn, spend then pay tax. By

o t ast, the just o e oke u a d dad ea , pa ta the spe d.

I love what Kerry Packer said at the Print Media enquiry in 1991:

I a ot e adi g ta i a a , shape or form. Now of course I am minimizing

my tax and if anybody in this country

doesn't minimize their tax they want

their heads read, because as a

government I can tell you you're not

spending it that well that we should be

do ati g e tra.

Very true and very sobering.

That is h I eated Wealth Safe . I wanted to help people to build wealth safely, while ensuring that we gave you exceptional service in

educating you to become a smart wealth investor, and to have the

highest quality structures available to you to protect your assets and

substantially slash your tax (all 100% legal).

From my experience, many of our clients have no idea of the incredible

secrets that the rich know which can help you to slash your tax and

keep scumbags far from your assets.

https://www.facebook.com/WealthSafePtyLtdhttps://twitter.com/WealthSafeAUhttp://au.linkedin.com/in/warrenblack1/

I e ee o ki g i ealth eatio a d protection for over 25 years, including 10 years at the Tax Office working as a tax auditor (yes, I really

was on the dark side!). This gave me a lot of insight into the secrets of

tax, how the system really worked, and fuelled my passion further.

It is what helped me develop unique skills in specialist tax planning,

asset protection, commercial law and international tax.

(I even won a prestigious prize at University from Mallesons Stephen

Jacques, a top 8 law firm, for my Honours thesis on Income Tax and

Capital Gains Tax.)

A a , I hope this ooks se es ou i uildi g ou ealth. I d lo e to get your feedback, or help you with any queries, as would my team, so

if you need to clarify anything, just click on this link and put your

request in, and one of my team will be glad to help you.

Warren Black B Com , LLB (Hons), Dip Fin SCEO

Wealth Safe

DISCLAIMER: This information is for general purposes only. Do not rely on this information

without seeking further professional advice an accountant or lawyer.


Table of ContentsFo a d ………………………………………………………………………………………………………..1Chapter 1 – Using Trusts To Grow Your Wealth …………………………………….……. 6What is a T ust? …………………………………………………………………………………………… 7What is a Settlo ? ……………………………………………………………………………………….. 8What is a T ustee? ………………………………………………………………………………………. 8What is an Appointor? ……………………………………………………………………………….. 9What is a Be efi ia ? ………………………………………………………………………………… 9Si ple E a ples of T usts …………………………………………………………………………. 10What A e The Diffe e t T pes of T usts? …………………………………………………… 11Wh Should I Use a Co pa as T ustee? ……………………………………………….... 13Ho Ca a Fa il T ust Help Me …………………………………………………………………14What A e The Be efits of a Fa il Dis etio a T ust? ……………………………..15Ho Does a T ust P ote t Assets? ……………………………………………………………… 16Ho Does a T ust Help Me Sa e Ta ? ………………………………………………………… 17A e The e A D a a ks With T usts? …………………………………………………….. 22Ho Do I Get Mo e Out a d Put Mo e I to a T ust? ……………………………..23Wh Ca t I Just Lea e Mo e I M T ust a d Not Dist i ute It? ……………….25Do I Ha e To Gi e The Mo e To The People I Dist i ute It To? …………………..26What Is A Bu ket Co pa A d Ho Does That Help Me I M T ust? …….. 27Ca I gi e all the o e to hild e ? …………………………………………………… 28What About Negative Gearing And/or Losses In A Trust? ……………………………31What If I Want To Buy Property and Have No Cashflow Means in the Trust? 32

Summary …………………………………………………………………………………………….. …. 33Chapter 2 – Are Your Assets Protected? …………………………………………………... 34I t odu tio …………………………………………………………………………………………..... 35The Fa ts of La suits ………………………………………………………………………………….37The Strawman a d The Pe so of Su sta e …………………………………………….. 40Using a Company to Protect Assets ………………………………………………………….. 41Usi g a T ust to P ote t Assets ………………………………………………………………….. 43Busi esses a d Asset P ote tio …………………………………………………………………45Investors and Asset Protection ……………………………. ……………………………. …… 48Employees and Asset P ote tio s …………………………………………………………….. 49Summary …………………………………………………………………………………………….. …… 50


Table of ContentsChapter 3 – Bloodli e Estate Pla i g ………………………………………………………. 51Introduction ……………………………………………………………………………………………… 52Do You Ha e a Will I Pla e? …………………………………………………………………….. 53What T pes of Wills A e A aila le? …………………………………………………………… 54Sta da d o Si ple Will ……………………………………………………………………………. 55Th ee Ge e atio al Testa e ta T ust Bloodli e Will ………………………….. 56Ta atio Issues …………………………………………………………………………………………. 57Fa il Cou t a d Ma iage B eakdo ……………………………………………………. 60Po e s of Atto e ………………………………………………………………………………….. 61Su a …………………………………………………………………………………………………. 64Chapter 4 – Superannuation …………………………………………………………………… 65Introduction …………………………………………………………………………………………….. 66What is a Self Ma aged Supe a uatio Fu d SMSF ? ………………………….. 66Does This Mea I Ca A ess Reti e e t Mo ies Ea l ? …………………… 67Wh Should I Esta lish a SMSF? ……………………………………………………………… 67Can I use a SMSF to trade options or do buy writes? What about

futures or CFDs? ……………………………………………………………………………………… 68A e The e A Rest i tio s I What M SMSF Ca Do? …………………………… 69How much should I have in superannuation before setting up a SMSF? …. 70Ho Ma People Ca You Ha e i a SMSF? ………………………………………….. 71What are the tax rates? How do the new changes affect me? ………………… 71How much does it cost to set up a SMSF? ………………………………………………. 72The Superannuation Changes …………………………………………………………………. 72How are Superannuation Benefits Taxed? ………………………………………………. 72Tax Free Co po e t ……………………………………….……………………………………… 72Ta a le Co po e t ……………………………………………………………………..………… 73Ta ed A ou t ………………………………………………………………………………………... 73U ta ed A ou t ……………………………………………………………………..…………….. 73Disa ilit Be efit ……………………………………………………………………..…………….. 74How does the Law work with Super Death Benefits paid to

my loved ones when I die? ……………………………………………………………………… 74What happens after 1 July 2007? ……………………………………………………………. 75


CHAPTER ONE

Using Trusts To

Grow Your Wealth


What is a trust?

A trust is a legal device used to manage real or personal property,

established by one person (the grantor or Settlor) for the benefit of

another (the beneficiary). A third person (the trustee) or the grantor

manages the trust.

Trusts go back to the days of the Holy Crusades in the 11th and 12th

centuries.

Knights were forced to go and fight in the Middle East. If they were

killed on the journey or in battle, their assets would go to the King.

The Knights Templars and the Monks came up with the idea that the

K ight s assets should e held i t ust fo the e efit of the K ight a d his family, whilst not actually being owned by the Knight himself. This

allo ed the K ight s assets to pass to his fa il if a thi g as to happe hile he as a a . It p ote ted the K ight s assets.

The sa e p i iple applies toda . It s just that the aide s a e i the courtroom, the lawsuit world, governments, creditors, and others who

want to reap where they have not sown.

No let s take a lose look at the parties in a trust. These are:

1. Settlor

2. Trustee

3. Appointor

4. Guardian

5. Beneficiaries

•I look at these closer below.


What is a Settlor?

The settlor is the person who establishes the trust. In practice, it is

someone unrelated to the trust who puts in $5 or so.

It is important that the settlor is totally unrelated to the people setting

up the trust as there can be tax issues otherwise. It is usually the

accountant or lawyer.

What is a Trustee?

The trustee is the person or company responsible for making the day to

day decisions on behalf of the trust. The trustee can be either one

individual; joint individuals; or a company. If it is a company, then you

control the company by being the shareholder and director.


Who is an Appointor?

The appointor is God fo all i te si e pu poses. The appointorultimately controls the trust and can hire or fire the trustee.

The appointor is a very important person in the trust, and must be

chosen carefully. They ultimately are the true controller of the asset,

and you need careful advice for asset protection purposes who should

be the appointor as the wrong choice can be disastrous.

Only a discretionary trust has an appointor, not a unit trust.

What is a Beneficiary?

The beneficiaries are the persons who benefit from the trust.

With a unit trust, there are fixed beneficiaries called unitholders.

With a discretionary trust, the beneficiaries are either default or

primary beneficiaries (who default to the income if no resolution or

distribution of income or capital is made) or general beneficiaries.

The key point is in a discretionary trust, no beneficiary is entitled to the

income. This is discussed further along in this book.


Simple Examples of a Trust

Let s gi e a si ple e a ple of a t ust.

EXAMPLE 1

John gi es A e $ , to gi e to Joh ’s sister i da s ti e. The sig an agreement in writing to this effect.

That is a trust. John is the settlor (as John created the trust), Anne is the

trustee as A e is holdi g the $ , o trust for Joh ’s sister a d Joh ’s sister is the e efi iar as she is e efi iall e titled to that $1,000, and would have a claim against Anne as the trustee if Anne was

naughty and decided not to pay up). Even if it was not in writing, but it

was done verbally, it would still be a trust.

Let s take a othe e a ple.

EXAMPLE 2

John gives Anne $10,000 to invest and pays any income earned on that

$10,000 to Derek.

John is the settlor (as John gave you the $10,000), Anne is the trustee

(as Anne is holding the $10,000 on trust, and is investing it to produce

income), and Derek is the beneficiary (as Derek is entitled to the income

from the $10,000 and the $10,000 itself).


What Are The DifferentTypes of Trusts?

There are many types of trusts.

There are 42 types of trust to be precise! However, the two main types

are unit trusts (fixed trusts) and discretionary trusts.

Unit trusts

These are similar to companies. They have a fixed entitlement to the

trust assets and profits. The parties are a settlor, a trustee and

e efi ia ies ith the e efi ia ies ei g k o as unitholders , as opposed to o pa ies, he e holde s a e alled sha eholde s .

For example, if John sets up a trust, and wants to give Anne and Derek

a 50% entitlement each to the trust capital and profits, and make Mary

the trustee of that trust, John may use a unit trust, and give Anne 50%

of the units in the trust, and Derek 50% of the units in the trust. John is

the settler, Mary is the trustee and Anne and Derek are the unitholders.

Discretionary trusts

These are a totally different entity.

They are popular structures for tax planning & asset protection. The

discretionary trust has a settlor, trustee & beneficiaries.

It also has an appointor. The trustee manages the trust property and

investments, and pays out the net income for the benefit of the

beneficiaries. The appointor ultimately controls the trust. The

appointor has the right to hire and fire the trustee (and is the true

controller of the trust).


Some discretionary trusts have a guardian who is the ultimate

controller behind the appointor.

The beauty of a family discretionary trust is the beneficiaries are a wide

class of people. Any one of them can receive the income as the trustee

has discretion to pay the income out in whatever proportion he or she

pleases to the beneficiaries. There is no restriction.

For tax planning purposes, and asset protection, this is one of the great

benefits of a trust.


Why Should I Use A Company As Trustee?

Very simple.

A corporate trustee is the most common way to set up a family trust,

and it is what I recommend. There are various reasons for this, asset

protection being the main one (as I said), but also, there are questions

which have been raised by courts as to whether individuals are legally

allowed to receive trust distributions if they are the trustee.

With a corporate trustee, the individual controls the company by being

the shareholder and director.

As said above, trusts have a corporate trustee is for asset protection

purposes. Where the trustee of the trust is subject to litigation – such as pe so al lia ilit legal a tio i elatio to o e of the t ust s properties if a trust has individuals as trustees of the trust, they will be

jointly and severally liable for any such action.

By contrast, where there is a corporate trustee any action undertaken

will be limited to the assets of the company not those of the underlying

directors.

The corporate trustee is a Pty Ltd company which is usually set up at

the same time as the trust. Depending on the type of assets the trust

will be holding, it may be beneficial to have one or many directors.

We can advise on this at the time we set up the trust.


Can you give me an example of how a family trust can help me?

Assume John sets up a discretionary trust (as the settlor) with Smith Pty Ltd as

the trustee (Fred Smith and Mary Smith control the company). Mary Smith is

the appointor. The trust is set up to hold assets and invest monies to generate

and distribute the profits at their discretion to the beneficiaries (which are

their children, James, Jack and Jenny, relatives and charities).

Let us further assume Fred and Mary make $100,000 profits from their

investing and other business activities in the 2008/09 income year.

Fred and Mary can distribute the money each year to who they want and in the

proportion they wish. And the beauty is whoever gets the money pays the tax.

They can give it all to their 3 children. They can give 70% to James, 10% to Jack,

and 20% to Jenny. They can give 30% each to themselves, 20% to each of their

children and the remaining 10% to their favourite charity or local church.

In distributing the $100,000, let us assume Fred is earning $80,000 per annum.

Fred will pay tax at the highest marginal rate of 45% (plus 1.5% Medicare levy).

Fred and Mary may decide to distribute no money to Fred, $60,000 to Mary (as

Mary pays no tax but stays at home so the tax on $60,000 will only be

$13,350), $30,000 to their family company (which pays tax at 30%, so tax will

be $9,000) and the remaining $10,000 to their local church (which pays no tax

at all). So the total tax will be $22,350 ($13,350 + $9,000).Yet if Fred had done

everything through his company, he would have paid tax of $30,000 on the

$100,000 and if it had been in his own name, he would have paid 46.5% tax.

Worse still, any money he had given to his local church would have come out of

his after-tax income. Yet by using a trust, it comes out of the pre-tax income.

As you can see, this gives huge tax planning flexibility and savings.

This describes a classic family trust. In our view, a family trust is still one of the

best structures available in Australia to protect assets and reduce income tax


What are the benefits of a family discretionary trust?

Trusts are wonderful for a number of reasons:

1. Compliance costs. They have low compliance costs unlike

companies (ie. they cost almost nothing to set up and involve less

accounting work).

2. Taxation of trust income. Trust income is taxed in the hands of the

beneficiaries, not the trustee. This is very important and is the key

feature of trusts which makes them so attractive. Therefore, as the

trustee has discretion in making their distributions of profit, they

can distribute the profit to the beneficiaries with the lowest tax

rates; they can even distribute to exempt charities (meaning they

are effectively distributing to them from pre-tax income)

3. Asset protection. For asset protection purposes, family trusts are

very difficult to penetrate. You control not own the assets, and the

courts have continually upheld this (apart from a few exceptions).

Mind you, in some circumstances the Bankruptcy Act and the

Family Court Act allow the Trustee in Bankruptcy and the Family

Court to look through the t ust … also Ce t eli k also have such powers in relation to family tax benefits)


How Does A Trust Protect Assets?

As I have said above, the main reason trusts are used is for their ability

to protect assets (as well as the ability to minimise tax, although this

as t al a s the ai easo .

The reason why trusts can protect your assets is if the trust is sued, the

trustee is the entity that the action is taken against. As explained above

the trustee is a Pty Ltd company, and as many people will know

companies have limited liability, which protects their shareholders.

If the trust was to be sued, the appointor/gua dia Puppet Maste sa ks the t ustee Puppet ho is ei g sued a d appoi ts a e one. If the lawsuit then continues against this company it owns nothing

more than $2 in shares and no assets.

In this case the person suing you would walk away with little or nothing

or would most likely give up suing you altogether.

In saying that, there are laws which prevent the transfer of assets to

defraud creditors, so appointors must be aware of this. However at a

very minimum, the trust will protect assets held outside the trust if the

trust was to be involved in a lawsuit.

Fo o e i fo atio see ou se tio late o A e You Assets P ote ted?


How Does A Trust Help Me Save Tax?

Trusts save you tax in two ways:

1. The t ust has o ta ate so the t ust s i o e a e split et ee the t ust s e efi ia ies ho pa ta at thei a gi al

rate; and

2. The trust pay expenses out of pre-tax income.

So there are a few great benefits.

Distributions To Beneficiaries

As stated above the trust (unlike companies) has no tax rate. Instead

the beneficiaries of the trust are taxed at their marginal tax rate.

This depends on the amount of taxable income they have been

distributed from the trust.

As many people would know, your PAYG income cannot be distributed

between family members and/or even spouses. This is where a trust

differs and where careful tax planning must take place to ensure you

get the maximum tax benefit.


EXAMPLE:

Let us assume John sets up a family discretionary trust (as the settlor)

with Smith Pty Ltd as the trustee (Fred Smith and Mary Smith control

the company). Mary Smith is the appointor. The trust is set up to hold

assets and invest monies to generate profits and distribute the profits

at their discretion to the beneficiaries (which are their children, James,

Jack and Jenny, relatives and favourite charities).

Let us further assume that Fred and Mary make $100,000 profits from

their investing and other business activities in the 2011/12 income year.

Fred and Mary can distribute the money each year to whoever they

want to and in the proportion they wish. And the beauty is – whoever gets the money pays the tax.

They can give it all to their 3 children. They can give 70% to James, 10%

to Jack, and 20% to Jenny. They can give 30% each to themselves, 20%

to each of their children and the remaining 10% to their favourite

charity or local church.

To be more specific, in distributing the $100,000, let us assume that

Fred is earning $80,000 per annum. Fred will pay tax at the highest

marginal rate of 45% (plus 1.5% medicare levy). Fred and Mary may

decide to distribute no money to Fred, $60,000 to Mary (as Mary pays

no tax but stays at home so the tax on $60,000 will only be $13,350),

$30,000 to their family company (which pays tax at 30%, so tax will be

$9,000) and the remaining $10,000 to their local church (which pays no

tax at all). So the total tax will be $22,350 ($13,350 + $9,000).Yet if Fred

had done everything through his company, he would have paid tax of

$30,000 on the $100,000 and if it had been in his own name, he would

have paid 46.5% tax. Worse still, any money he had given to his local

church would have come out of his after-tax income. Yet by using a

trust, it comes out of the pre-tax income.


As can be seen from the above example the ability to spread the

income between different parties can save thousands of dollars of tax

every year.

Also, unlike PAYG income, where tax is removed every pay cycle, in a

trust, tax is only payable on distributions made at the end of the

financial year. This means you can invest your money for 12-18 months

longer without having to withdraw the tax.

This could have great compounding effects on your investments.

Expenses Out Of Pre-Tax Income

Under the Australian tax system most things we buy (apart from some

small items we can salary sacrifice) come out of our post-tax income.

For example if you are on the top marginal tax rate in Australia, an item

costing you $30 can really cost you $56. Over time this can add up.

However as the trust is treated like a business, the trust can pay for

items related to that business out of pre-tax income. In the case of the

$30, you have saved yourself $26 which can be reinvested.

Like the above distributions this can have amazing compounding effects

over time, and help you seriously accelerate your wealth building.

Did you know if you had a trustset up before buying your share /

option trading courses, and a trading plan, you MAY be able to claim your expenses

to do with the course? (There are a lot of factors, but get advice anyway )


Can You Give Me Another Example?

Let s give a further example to show how wonderful trusts are for business people. We will use the Smith Family Trust from the above

example.

EXAMPLE

Fred goes to an options trading seminar and learns how to trade

options. Fred opens up a brokerage account with an options broker in

the name of the Smith Family Trust.

Fred has been working, makes $80,000 per year, while Mary earns no

income, preferring to stay home and look after their 3 children James,

Jack and Jenny. She has no interest in options trading. Fred goes to

church and pays 10% to his church each week from his after tax income.

Fred makes $60,000 in net profits before tax from his trading. On his

a ou ta t’s ad i e, for the Ju e ta ear, Fred distri utes $ , to Fred, $ , to Mar , $ , to Fred’s hur h, $ to James and Jack (aged 10 and 14 who earn no income) and $4,000 to

Jenny (his 18 year old daughter who earns $10,000 per annum). The

re ai i g $ , he distri utes to his fa il o pa S ith Investments Pty Ltd .

So what happens for tax purposes?

As profits are taxed in the hands of the beneficiaries.

Fred will be taxed on his normal day job income plus his $5,000

distribution at 48.5% ($2,425). Mary pays tax of $7,054 on her $35,000

distribution (about 20%).


John and Jack will pay no tax on their money as they are earning no

income. Jenny pays tax of $650 on her $4,000 (17% tax as she is in the

lowest marginal bracket as she only earns $10,000 per annum). And with

the $5,000 paid to his church, not only will there be no tax to the church,

but Fred can distribute it out of his pre-tax trust income. If he was giving it

from his day job income, it would come from his after- tax income.

The company, Smith Investments Pty Ltd, will pay tax at 30% on its $10,000

distribution ($3,000).

As you can see there are considerable tax savings available to Fred. If he

had earned all of his profits in his own name, he would have paid tax of

$29,100. By doing it this way, he pays tax of $13,479, more than 50% less.

This is a saving of nearly $16,000.

It gets etter. Let’s sa Fred’s ear old daughter got a jo pa i g $60,000 per annum next year, while Fred quits work to be a full time

options trader. Fred can simply distribute more income to himself and less

to his daughter.

And there are other wonderful things you can do with trusts.

I the a o e e a ple, ou ight ask: h ould t F ed dist i ute o e to his 10 and 14 year old sons? Surely with the $6,000 tax free thresholds,

he could save a fortune in tax! The problem is there are penalty tax rules

in Division 6AA of the Tax Act if you distribute profits from a trust to

children under 18. Unless the amount is less than $2,500, or falls within

certain exemptions, it is taxed at the top marginal rate of 48.5%.

Can You Give Me Another Example?


Are there any Drawbacks with Trusts?

Yes. There are two problems with family trusts in Australia.

1. Accumulation of income

Trusts cannot accumulate the income. The trustee must distribute the

income to the beneficiaries each year. You can accumulate income with

companies but not with trusts.

If a trust accumulates income, the trust pays 48.5%. (This does not

mean the trust must pay out the income every year; it can distribute

the money on paper but can avoid paying it out indefinitely if it so

desires.) So if you want to accumulate income, you are best to set up a

family company alled a u ket o pa a d distribute the money you wish to accumulate from the trust into the family company.

2. Buying negatively geared property

If you are buying negatively geared property in a trust, the losses

cannot be taken out of the trust. That means you cannot easily offset

the negative gearing losses against your personal income. They get

trapped in the trust.

To avoid this result is difficult. You should get further advice about a

family trust election with other family trusts, or else, using a hybrid

trust or a discretionary trust loan agreement.

Please contact us to discuss this further.


How Do I Get Money Out And Put Money Into My Trust?

Money Out

As stated above getting money out of your trust is as simple as making

a distribution (or loan). This distribution can be made as easily as a

bank transfer from the trust account to your own personal account.

It is important to remember at this stage, however, that any payments

made from your trust to yourself are included in your taxable income.

Therefore you must keep stringent records so these amounts can be

included in your tax return (there is a specific section in your tax return

for distributions from trusts).

It is not just money that can be distributed out of your trust. Capital

gains and franking credits can also be passed out of your trust to the

best beneficiary to reduce the total tax payable.


Money In

Putting money into your trust to invest with can be done in two forms:

1. Gifting the money from your own personal income to the trust.

2. A Loan from you to the trust.

Many people will tell you that the only way to put money into your

trust is via a loan and the failure to draw up a loan agreement will lead

to the money gifted in being taxed twice or penalties being enforced.

This however is not the case when money is being gifted from a

beneficiary to the trust.

You should keep clear documentation in the case of a gift to make sure

that the monies which are gifted in are not included in the trusts

taxable income for that year.

Even though as explained above a loan agreement is not necessary,

many people still decide to draw up such an agreement due to the

effects an agreement may have. By putting in place a loan agreement

with a rate of interest (at market rates) the interest paid will become a

deduction in the trust and income to the person loaning the money.

Such loan agreements can be used to improve the tax effects for either

the trust or the individual loaning the money.

When a trust is set up, we would love to advise which method will work

most effectively for you and what possible benefits may be available in

your own personal situation if a loan agreement is drawn up.


Wh Ca ’t I Just Lea e The Mo e In My Trust And Not Distribute It?

A uestio e ofte get asked ou lie ts is h do t I just ot distribute the money to anyone and therefore no one has to pay tax on

it?

U fo tu atel it does t o k this a .

If the trust does not distribute all of its income (profit) every year to

one of a number of the beneficiaries that income will be taxed at 46.5%

(the top marginal tax rate).

This will not normally happen though as the trust will distribute its

income to a number of the various beneficiaries who will pay at their

respective tax rates.

If you are looking at holding money in your trust for long periods of timeyou should look at a bucket company,

which will be explained later, to reduce the amount of tax payable

each financial year.


Do I Have To Give The Money To The People I Distribute To?

Anyone can be named as a beneficiary on your trust. However it is

usually limited to family members and associated trusts and

companies. There is no requirement for these people to be informed

that they have been made a beneficiary of the trust when it is first

drawn up.

If you plan on making a distribution to a particular person they must be

informed due to the reason that this income must be included in their

tax return for that financial year.

This money will then be taxed at their marginal tax rate which, if lower

tha ou o , a e a effe ti e a of i i izi g the t ust s taxable income.

Once this money has had tax paid on, it is the income of that person.

However what happens in practice is that agreements are put in place

so that although one person may pay the tax on that income, and

receive a nominal amount for doing so, the original controller of the

trust ends up with the income.

As stated above the most important aspect of distributing to people

other than you is letting them know of the distribution before it

happens so that they may seek advice as to how this will affect their

taxable income for that year.

Such payments may also affect government payments if these

payments break thresholds.

So you have to be careful.


What Is A “Bucket Company”? And How Does That Help Me In My Trust?

The te u ket o pa des i es a o pa hi h is set up as a beneficiary of your trust to accumulate money. The reason the term

u ket so eti es also alled slosh o holdi g is used is e ause it sits below your trust and is used to pour money into to reduce tax.

The easo h u ket o pa ies a e effe ti e is the ha e a flat tax rate of 30%. They are therefore effective when your beneficiaries

have marginal tax rates of 30% or more.

EXAMPLE

The Smith Family Trust has $100,000 of profit to distribute and all

current beneficiaries are on the highest marginal tax rate of 46.5%. The

members of the Trust would like to reinvest this $100,000 into a new

investment which starts in the new financial year. They want as much

money as possible to put into the investment.

If this $100,000 was distributed to the current beneficiaries the tax

payable would be $46,500. If however the money is distributed to Smith

Pty Ltd (a bucket company) only $30,000 tax would be payable. This

enables $16,500 extra to be invested. This leads to an extra $280,000

for the trust with compounding effects over 10 years at 7% interest.

As this money will be taxed at the company tax rate it can then be

loaned back to the trust which can then reinvest the money.

If this money needs to be distributed at a later date, it can be paid in

the form of a fully franked dividend where the person who receives this

distribution can fully use the franking credits to reduce their tax on

their income.

For this reason this can be an effective way of reinvesting money at a

lower tax rate and wait for a time when your marginal tax rate is lower

before paying it to you or another beneficiary.


Can I Give All The Money To My Children?

Whe the te fa il t ust the fi st thought that o es to a people is a I gi e all the o e to hild e to sa e ta ? Although this would be a wonderful thing it if were true unfortunately this is not

the case. When it comes to children there are a number of different

rules depending on their age and what role they play in the trust.

On distributions being made to children there are 3 important age

groups:

1. 0 – 142. 14 – 183. 18 and over

Each of the above ages has different distribution rules and different tax

rates. For children up to age 18, until recently, up to $3,000 could be

distributed to them, however, now, it is only $416. Any amount over

this will be taxed at 46.5% and therefore not beneficial to distribute any

amount above this.

Whe dist i uti g to hild e , ou take a e to e su e the ha e t received any other income such as bank interest which would push

their total income above $416.

Note also that once a child reaches the legal working age in Australia

(which varies between the States – see table below) they can be employed in the trust so long as they are doing work for the trust. At

this stage the child can be paid from the trust at their marginal tax rate.

(For example they will receive the first $6,000 tax free).

It is important to discuss this with an expert before making such a

decision as such considerations as superannuation must be considered

and rates differ from year to year.


State Legal Working Age

New South Wales, Northern Territory, The minimum age for employment outside school hours

South Australia, Tasmania is 14 years of age for casual and part time employees.

Victoria The employment of children is governed by the Child

Employment Act 2003 which states that the minimum

age of employment is 15 years of age.

Queensland With effect from 1st July 2006 employment in

Queensland is governed by the Child Employment Act

which requires employees who are under 16 years of age

and have not yet finished year 10, to provide parental

consent to commence work.

Employees under 16 may only work 12 hours during a

school week (38 hours a week during school holidays),

with each shift being a maximum of 4 hours Monday to

Friday and 8 hours Saturday and Sunday.

All hours of work must be between 6am to 10pm.

Western Australia With effect from 1st July 2006 employees who are under

15 years of age need to provide parental consent to

commence work.

For legislative reasons employees under 16 years of age

may not work during school hours and those under 15

years of age may only work between the hours of 6am

to 10pm.

Australian Capital Territory The recommended minimum age for full time

employment in ACT is school leaving age (i.e 15 years

of age). It is possible to be employed below this age for

a maximum of 10 hours per week. However if you wish

to be employed for more than 10 hours per week, prior

approval must be obtained from the Chief Executive of

the Department of Housing, Disability and Community

Services.


Fo hild e o e the ages a o e ut a e ot e plo ed i the t ust the $416 limit still applies.

Once a child reaches the age of 18 they are no longer restricted as to

the amount of income they can be distributed and they will pay tax at

their marginal rate. For children that turn 18 in a tax year please see

the below example.

Division 6AA ($416 limit) only applies where the child is under 18 at the end of

the tax year. If the child turns 18 during the tax year, $18,000 can be distributed to the child tax free. However, take care with this approach as students who cease full time education during the year may need to pro

rata their tax free threshold.


What About Negative Gearing And/or Losses In A Trust?

Many people will tell you that the main disadvantage of a trust is that

losses cannot be used. That is, you cannot claim your negative losses

against your income in your personal name.

Although there is truth in this saying, the statement is not always true.

For starters, so long as the trust is controlled by members of the same

family through the years losses from one year can be used to offset

profits in the next year, or even in future years if there has been years

of running losses.

EXAMPLE

If John lost $10,000 one year and $12,000 profit the next, John only has

a taxable income of $2,000 in that later year, as you can offset the

losses from the earlier year.

Therefore the only real problem is the timing of the losses. Ultimately

you will get them in most situations. It is just a question of when you

get them.

It is fo this easo that it s i po ta t that all e pe ses a e lai ed each financial year, even if you are running at a loss, due to the fact

that you can use these expenses in later years.

In addition to using trust losses in later years, family trust can make

hat is alled a fa il t ust ele tio so that losses f o o e fa il trust can be used to offset gains in another family trust. This is often

used where one trust holds negatively geared property while the other

is trading shares. The family trust election allows the losses from the

property to offset the gains from the shares, in turn reducing the

taxable income of the share trading trust.


What If I Want To Buy Property and Have No Cashflow Means in the Trust?

Many clients come to us with the fact that they only want to buy negatively

geared property for buy and hold and do not have any other positively geared

investments in other trust.

However these clients still want to buy their property in a trust so that they can

take advantages of the asset protection and tax benefits.

In this situation it may be possible to claim negative gearing in your own name

to offset PAYG income, while still taking advantage of the benefits of a trust.

Two possible options are:

1. Hybrid Trust

2. Loan Agreements

It is suggested if you are looking to invest in negatively geared property you see

an expert who can advise you on the options as the ATO are looking closely at

these options. As to the savings that can be made by investing in a trust with

property see below.

EXAMPLE

Jack buys a negatively geared property in the Jack and Jill Property Trust. He

earns $110,000 while Jill stays at home with the kids and earns $6,000 from

selling her knitting on EBay. Jack and Jill sell their property and have a

$100,000 capital gain.

As the ’ e o ed the propert for lo ger tha a ear the re ei e a % discount. If Jack had to pay this himself he has to pay $21,250 in capital gains.

By distributing the capital gain all to Jill and his two children they only pay

$12,575 in capital gains a saving of nearly $9,000 and the savings would

increase depending on the size of the capital gain.


Summary

Trusts are a wonderful vehicle to protect your assets. They are also a

wonderful vehicle to save a fortune in tax.

There are many myths about trusts. That it is why it is important to see

an expert. At the same time, however, there are many myths and

assumptions as to what you can do with trusts. Without careful

planning, and strategizing, you can end up with significant problems.


CHAPTER TWO

Are Your Assets Protected?


Introduction

Are your assets properly protected?

Is your wealth foundation watertight from any creditors or lawsuit-

hungry predators who would eagerly seek to plunder your wealth to

eap he e the ha e ot so ?

You may think so. But you may be in for a shock.

Did you know that:

• New South Wales is the second highest jurisdiction in the world for lawsuits per person, only behind California in the USA? And Victoria

is not far behind?

• the average Californian gets sued 4-5 times in their lifetime, and one of the lawsuits is a COMPLETE FINANCIAL WIPEOUT? (And New

South Wales and Victoria re not far behind, and the rest of the

States are fast catching up?)

• ou a e lia le fo so eo e else s de ts ot o l i a pa t e ship but also in a company or trust?

• your professional indemnity insurance policy may not cover you if you get sued?

• employees can be sued personally for causing losses for clients of their boss?

These are some of the sobering facts that we face in the world today.


Most people have no idea that their hard earned assets have no

protection whatsoever. As asset protection experts we spend more

ti e u i g tha p e e ti g fi a ial a e .

In this book we seek to address this issue. :

1. We examine the basic principles of asset protection while giving

you a series of examples

2. We answer some frequently asked questions that help you

determine if you are at risk in a lawsuit, and how you can fix that

situation. For example we consider questions such as:

• Why do I need asset protection? • I have an insurance policy. Surely that will cover me? • I already have a company and trust so am I now protected? • I a a e plo ee. Su el I do t eed asset p ote tio ?


The FACTS of Lawsuits

You think that you are safe from a lawsuit?

Let me give some real life examples of lawsuits that can happen. And

that have happened.

EXAMPLE.

1. In California, a woman slipped on a drink in McDonalds and

successfully sued them. This was despite the fact that she had

thrown the coffee at her boyfriend 30 seconds earlier!

2. A woman tripped over a rampant toddler in a furniture store, sued

the store and won compensation for her injuries. Do you blame the

owners for being surprised considering the toddler was her son?!

3. A burglar broke into a house and when attempting to leave with

the spoils, got trapped in the remote garage. He lived for 8 days on

a chocolate bar before the householders returned from their

holidays. The burglar sued the householders for being imprisoned

against his will. Guess what? He won damages for his mental pain,

anguish & distress!!

That s all e ell, ou sa . That sou ds like A e i a.


Let me give you some real life examples in Australia.

EXAMPLES

1. In Western Australia, a hotel barman refused to give a drunk man

his car keys. When the drunk man became abusive and

threatening, the barman reluctantly returned the keys. The drunk

man jumped into his car, drove off, and went straight into a pole.

He was injured. He sued the hotel for giving him back his keys

when he was drunk. And you guessed it, he won!

2. I NSW, a ou g a roke i to the a ager’s house a o e a nightclub to try and get into the nightclub. The manager found him

outside his hildre ’s’ roo s a d lo ered hi . Both the ight lu and manager were found liable for damages to the young man.

Quite outrageous you say. But unfortunately what is happening right

now in the real world.

It is becoming an epidemic problem. In USA for example, according to a

survey by consulting firm Towers Perrin, the statistics show the cost of

all liability torts (including damages, lawyers' fees and administrative

fees) accounted for nearly 2.09% of gross domestic product, or $261

billion. This contrasts to 0.62% in 1950. (A tort case involves a civil

wrong and seeks damages for harm done to people or property.)

At one stage, the median jury award in product-liability cases was $1.8

million, estimates the National Small Business Association, a lobbying

group, and the success rate of people suing in the US was 61%.

That is, there is over 50% likelihood if you are sued that you may lose

(on a statistical level).

The seriousness of this threat has led to companies taking extreme

measures. One is labels and warnings on products bordering on

insanity, almost a joke, but sadly are true.


Here are some of the warning labels that US companies have introduced to ward

off lawsuits.

EXAMPLES OF WARNING LABELS

1. Keep pet irds out of the kit he he usi g this produ t Bialetti Casa Italia a’s nonstick pans) (NOTE: Polly may not have a thing for fancy cookware, but she might not like the fumes potentially given off by hot

Teflon! Manufacturers are concerned about being sued for pet birds dying.)

2. This ostu e does ot e a le flight or super stre gth Fra kel's Costu e Superman costumes)

3. Do ot iro lothes o od Ro e ta’s Irons)

4. Do ot use for perso al h gie e S ru i g Bu les Fresh Brush . NOTE: This label won an award at the annual Wacky Warning Label Contest hosted

by Michigan Lawsuit Abuse Watch, an advocacy group. Apparently the folks

at S.C. Johnson are afraid that customers will go to any length to get those

hard to reach spots on their backs, even by using a toilet brush!)

5. This produ t o es he used Razor s ooter

6. Ask a do tor efore use if ou ha e diffi ult uri ati g due to a e larged prostate Midol Me strual Co plete

7. Do ot eat Apple's iPod shuffle NOTE: Whe Apple i trodu ed its digital music player in 2005, the company added this warning on its Web site.

Parody or paranoia? The company wouldn't comment.)

Let s look at the strawman a d pe so of su sta e ethod to p ote t ou assets.


Strawman and Person of Substance

This is a great strategy for married couples or business partners in certain

situations.

Strawman is at risk of attack, and sign their name to everything. They are the

company director, trust appointor, signatory to risky deals. Person of Substance

is not at risk and signs their name to nothing, yet controls all the assets.

So the strawman is at RISK. But controls NOTHING. The person of substance is

NOT at RISK. But controls EVERYTHING.

How does this work practically? To illust ate, let s use a e a ple.

EXAMPLE

Egbert is a doctor and his wife Edwina stays at home with his 19 kids.

Egbert is the one at risk of being sued. Edwina is not at risk of being sued. Egbert

should e the strawman a d Ed i a should e the perso of su sta e .

With the family home, for example, although Doctor Egbert and Edwina could use

a family trust, or company, they lose the capital gains tax exemption for family

homes if they do. The other option is for Doctor Egbert to ensure that the house

re ai s i Ed i a’s a e as she is ot at risk * .

If the fa il ho e is i joi t a es, or i Do tor Eg ert’s a e, he ould tra sfer it to Edwina. But he should be VERY CAREFUL before doing so as such

transactions can be reversed if they were done to avoid creditors, or avert a

pending lawsuit.

(* Although that is usually true, the 2006 changes to the Bankruptcy Act means

Edwina may be liable in certain situations.)

As a general rule, however, the most effective way to protect assets is by

companies and trusts.


Using a COMPANY to protect assets

First, we will provide a brief outline of a company, and how it works.

A company is a separate legal entity from its shareholders. It can sue and

be sued. It can enter into contracts. In the artificial commercial world, the

realm of fiction, it is a real person. It has a legal name and its own ABN. It

has limited liability, ie. shareholders only have to pay any amounts they still

o e o thei sha es; the a t e fo ed to pa o pa de ts f o thei own personal assets.

Companies have 2 main players:

1. Directors. The di e to s a age the o pa s dail usi ess fo the shareholders

2. Shareholders. The shareholders are the owners of the company. They

have a fixed interest in the company assets in direct proportion to their

shareholding

Companies offer asset protection to their shareholders and to the directors.

As a general rule, for a company that trades in its own right (without being

trustee for a trust), the directors are at risk. The director should be the

strawman, or an entity controlled by the strawman. The shareholders are

NOT at risk. They should by the person of substance, or an entity controlled

by the person of substance.


EXAMPLE

We will refer to our example with Doctor Egbert and his wife Edwina.

Eg ert is the a of stra a d Ed i a is the perso of su sta e .

Doctor Egbert has a high risk of being sued. His partner Edwina has a

low risk of being sued at home with the 19 children and not working.

If Doctor Egbert operates his medical practice through a company, as a

doctor, he is at high risk of being sued.

1. Director. Doctor Egbert should be the sole director of the company.

Edwina should not sign cheques or attend company meetings to avoid

being a deemed director under Corporation Law.

2. Shareholders. Edwina (or a trust she controls) should be the

shareholder as she is not conducting any business activities where she

may be sued.


Using a TRUST to protect assets

Trusts are wonderful vehicles to save tax, protect assets and create estates

for your family for many generations. Trusts are wonderful structures

because as well as protecting assets, they can significantly reduce your tax.

There are various types of trusts. The main trusts used in business are

discretionary trusts and unit trusts. There are also hybrid trusts (a mixture

of discretionary trusts and unit trusts).

Family discretionary trusts are an ancient way of building and preserving

wealth. Indeed, trusts have existed since medieval times. Family

discretionary trusts protect assets because no-one actually owns the trust

assets, ie. the Trustee holds the assets on trust for a number of

beneficiaries and can give the assets and income to whoever the Trustee

desires at their discretion. They are a tremendous vehicle to use in

business or investment.

The parties to a standard family discretionary trust are:

• Settlor. The Settlor creates the trust

• Trustee. The Trustee holds the assets for the benefit of the Beneficiaries and manages the trust

• Beneficiaries. They benefit under the trust.

• Appointor. The Appointor is the puppet master; the Trustee is the puppet. The Appointor ultimately controls the trust with most trusts.

• Guardian. The Guardian controls the Appointor (although in virtually all trusts the Guardian and Appointor are the same person in the trust)

The Trustee is the PUPPET. The Appointor is the PUPPET MASTER. The

Appointor can SACK the Trustee at any time.


For asset protection, the Appointor a d Gua dia of the T ust is the pe so of su sta e a d the T ustee is the a of st a . The efo e, the Appointor and Guardian should be the person of substance, or an entity controlled by the

person of substance, while the Trustee should be the man of straw, or an entity

controlled by the man of straw.

It is common with family trusts (and recommended) the trustee be a company.

This creates a e t a fi e all of p ote tio et ee ou edito s a d assets.

The di e to of the t ustee o pa , of ou se, should e the strawman .

EXAMPLE

Going back to Doctor Egbert and his wife Edwina, Egbert will be the trustee or

director of the trustee company, and Edwina will be the Appointor and Guardian

of the Trust.

This way Edwina can sack the company as trustee if there is any risk of a lawsuit.

As a final comment, some attention has to be given to the Richpoint Federal

Court decision (dealing with the Westpoint collapse involving Norm Carey). If this

decision is followed, it could have some ramifications for asset protection.

Norm Carey had used family trusts to shelter his assets as creditors. ASIC tried to

find a way to break his trusts to get the money back for the disgruntled investors.

The Full Fede al Cou t did t a tuall ha e to o side the issue. The easo as that it was only a preliminary hearing. However, the court hinted that in

exceptional circumstances, a trust could be penetrated. That is, it was hinted that

he e a t ust as eall the alte ego of so eo e like No Ca e , the question was whether there was really a trust at all, or whether it was really

No Ca e s o e ei g loaked i so e st u tu e.

It is important to note this decision was interlocutory, and subsequently, courts

have tended to read it down. Nevertheless, this case, along with Kennon v Spry

(2008) in the High Court, is showing an increasing willingness of the courts to

breach the virgin walls. It has certainly put lawyers and accountants and investors

and business people on red alert to think ahead in protecting their assets, and

ensure their trusts are carefully structured.

Getting proper expert advice to protect your assets becomes even more critical...


If you are in business or likely to be in business, your assets must be well

secured.

Once you enter the business arena, you are entering a litigation minefield.

Immediately you become a target. You are responsible for what goes wrong

in your business. If your employees make errors you can be sued.

Ensuring that your personal assets are protected from business lawsuits

ensure that the wealth you have built up from your hard work in business

remains intact.

EXAMPLE

We had a client come and see us. He and his wife had $2 million of assets.

He had worked hard all his life as an investment advisor.

One day, he made an error of judgment in advising a client. Just one.

However the consequences may be disastrous.

He may not be covered by his professional indemnity insurance because he

didn't follow the strict conditions of his policy as he recommended a

restricted overseas investment. If he is sued, most of his assets are exposed

because they are in his own name. Even his wife's assets are at risk because

she was a director in his company until recently.

Sudde l his hard ear ed ealth does ’t see se ure a ore...

However it is not just your personal assets that need protection. It is also

your business assets.

If you spend years building up a valuable client list, or goodwill in a

business name, one lawsuit can wipe out years of hard work. Yet some

simple planning can forestall all of this.

Businesses and Asset Protection


EXAMPLE

Dick Dastardly is starting business in finance consulting. His business is

alled Sho e the Mo e Ho e .

Dick is confident his business will develop substantial goodwill. He will

have finance consultants working for him on a commission basis. He will

use the internet in marketing his business, and have an online lending

facility for instant loan approvals.

Di k’s perso al ealth pla is to esta lish a usi ess to ge erate ash flo and put the money into investments.

Dick intends to buy positive cashflow property, to trade shares, options

and Forex, to buy international growth shares, currencies and gold bullion,

among other things.

Di k ould set up a trust I Hold Assets Trust to hold the usi ess a e Show e the Mo ey Ho ey , the business premises, and any other

valuable assets.

I Hold Assets Trust li e ses the usi ess a e a d pre ises to M Tradi g Trust hi h arries o the usi ess. If a o e sues the usi ess the ill sue M Tradi g Trust . This does NOT o the usi ess a e. It is only licensing it. It only holds cash. There are no cookies in the jar. The

assets are safe!

So Dick loses the money in that trust. However he just terminates the

li e e agree e t ith M Tradi g Trust a d sets up a e trust, ith a new licence agreement.

To protect his personal assets at the same time, Dick could set up a

separate trust to hold his properties (Property Trust), and a trust to hold

his investments and do his trading (Investment Trust).


Dick can protect his family home by putting it in a family trust or

borrowing heavily over his family home and putting it through trusts.

If Dick decides to go into business with his partner Muttley, there are

other great strategies available for Dick.

Dick is silly if he goes into partnership with Muttley as he is effectively

guaranteeing Muttle ’s debts. He is better off to set up a structure which protects him & Muttley and keeps their affairs separate, eg. unit trust, or

partnership of discretionary trusts.

If a ar thief a ts to steal Di k’s ar, he ill usuall prefer the Commodore with no alarm system or protection to the Mercedes with the

high tech alarm system.

The beauty of asset protection is that it is not about avoiding moral

responsibility if you make errors and cause losses to your client. It is

giving you the empowerment to make the moral choice if you are

responsible or not. Not the client, a court or somebody else


Investors and Asset Protection

If you are an investor, although your risk is less than a person in business,

you still are at risk.

For example, even though you are at not at risk for owning shares, you can

be sued by your tenants with respect to your investment properties. And

your professional indemnity insurance policy may not cover you.

EXAMPLE

John owns 3 investment properties in his own name. A visitor to one of his

properties sues him as the owner because he slips on a banana peel left by

the tenant carelessly on the stairs. The rental property insurer has refused

to cover him because of some fine print.

Suddenly all 3 of his investment properties are at risk ...

Companies and trusts can give you your asset protection with respect to

your properties.


Employees and Asset Protection

Do employees need asset protection?

Traditionally most employees do not consider themselves to be at risk.

However, this is not necessarily the case. Although in practice most

employers cover the liabilities of their employees, if there is a lawsuit, and

most creditors sue the employer rather than the employee (as usually

e plo ees do t ha e the deep po kets the e is o e tai t .

Employees are certainly at risk. This is clear from the High Court decision in

Houghton v Arns.

EXAMPLE

In Houghton v Arns, an employed internet website expert gave wrong

information to a company client about internet capabilities. This error cost

the lie t a sig ifi a t a ou t of o e . The lie t ould ’t sue the company as it was broke. So they sued the web designer and another

employee.

It was held that the web designer and the other employee were liable for

the $58,000 losses. The court said that the employee had been negligent

and careless and was responsible for the losses.

As employees, it is essential that you structure yourself to protect your

assets.

It is better to be forewarned and forearmed than find out the hard way

later on.


Summary

Asset protection should be considered by everyone, especially those in

business.

Companies and trusts are a tremendous way to protect assets.

Understanding the strawman and person of substance principle in all asset

purchases is critical.

However employees who invest in property and shares, or other assets,

should also o side asset p ote tio . E plo ees do t al a s sta employees. They often go into business. And with bankruptcy clawback

rules, you want the time clock to start running now.

It is not just your personal assets you need to protect. You also need to

protect the assets of the business, eg. business premises, goodwill. This is a

common mistake by many businesses. Using a double trust or company

structure can solve this problem. (I add that this double structure is used by

many of the large accounting and law firms in Australia.)

See us today to ensure your loved ones are properly protected. We are

happy to give you a no obligation fixed quote for any structuring to protect

your assets.


CHAPTER THREE

Bloodline Estate Planning

What is it?

And

Do I Need It?


Introduction

What do e ea estate pla i g ?

With your estate planning, we examine the following:

Wills

Many people die without a will, which can have terrible consequences. And

even if you do have a will, it may not protect you against the taxman or the

family court.

Powers of Attorney

Powers of Attorney allow you to sign documents on behalf of another (or

someone to sign documents on behalf of you). A Power of Attorney can be

valuable in your financial affairs, especially if a loved one has a serious

accident.

Let s look at these issues i o e detail. Fo o e i fo atio o the technicalities, such as executors, guardians, specific gifts, and the like, see

the Appe di , he e the e a e a se ies of F e ue tl Asked Questio s .


Do YOU have a will in place?

This is an important issue for you in protecting your loved ones. Dying

intestate (ie. without a will) can have terrible consequences for your loved

ones, as can be illustrated in the example below (based on a true scenario

with one of our clients).

EXAMPLE

Sa d a e to see us. Her hus a d had just died. Her hus a d’s sole asset (apart from a small amount of cash in the bank) was a house worth

$250,000. Sandy and her husband were on a pension. Her husband had not

ade a ill. Sa d asked us to fi alise her hus a d’s estate so that the house could be transferred to her.

We advised Sandy that under intestacy laws in Western Australia, Sandy

was only entitled to 75% of the estate. The remaining 25% went to her

de eased hus a d’s rothers. Her de eased hus a d had ot see his brothers for over 20 years because of a family dispute.)

It a e safel assu ed that this as NOT the result that Sa d ’s de eased husband would have intended.

At the least, without a legally enforceable will, you do not decide who gets

your assets after you die. That decision is made by the government. Is that

what you want?


What type of Wills are Available?

You can have two types of wills:

1. Standard Will.

2. Three Generational Testamentary Trust Will.

Let s look at ea h ill sepa atel .


Standard or Simple Wills

Most people have standard wills. In the most basic form, you go to the Post

Office, buy a Will Kit, and prepare a will. Or you go to the Public Trustee

and they prepare you a 1 page will.

After all a will is just a will is it not?

Not so!

A standard will is better than having no will at all. You have control over

who gets your assets when you die, not the government. It outlines the

percentages for your loved ones, and ensures that you choose your own

executors. And with clever planning, a standard will can be set up to ensure

that your estate can survive a will challenge.

But there are other important issues when doing a will. In particular, you

need to consider taxation and family court issues, especially if you have a

really big estate.

This is where you should consider a three generational testamentary

loodli e t ust ill.

These are discussed on the next page.


Three Generational Testamentary (“Bloodline”) Trust Wills

A three generational testamentary trust will ensures that your estate

remains protected and tax-free to the maximum level permitted by the law.

There are TWO main benefits of a three generational testamentary trust

will as compared to a standard will.

(I) Taxation benefits (ie. lower tax)

(II) Family Court and Marriage Breakdown (ie. protected from the family

court)

There are other benefits, including bankruptcy protection (ie. if your loved

one has gone bankrupt, their share of your assets is sheltered), but for now,

we will focus on the main two benefits.

Let us examine each benefit separately.


Taxation Issues

A standard will can result in unintended capital gains tax and stamp duty

consequences. Your loved ones can end up with a nasty shock. Let me

illustrate this by an example.

EXAMPLE

Fred and Mary have 3 children, Alex, Bertha and Christopher. Fred and

Mary own 3 investment properties, being 3 townhouses in a lovely

complex near the beach.

Fred and Mary die in a tragic car accident. The grieving children, Alex,

Bertha and Christopher, discuss whether to sell all the townhouses and

take the cash, or take one townhouse each. They agree to take one

townhouse each as they all like the location, and see strong capital

growth potential. The 3 children, Alex, Bertha and Christopher, have no

idea as to the potential shock that awaits them. Let me explain.

Before they died, Fred and Mary made a standard Will, stating that the 3

children shared the assets equally. That is, each child has a 1/3 interest

in each asset. This creates two problems for them:

1. The Stamp Duties Office says because they decided to take one

property each, each child has effectively transferred their 1/3 interest in

the property to the other child. The result? Stamp duty will be payable on

effectively 2/3 of the value of each of the 3 properties. Because each

townhouse worth $500,000, stamp duty for each townhouse is almost

$10,000 in Western Australia (total of $30,000).

(Not only that, but if Fred and Mary lived in NSW, their children may be

subject to vendor stamp duty on investment properties.)


2. While the children are picking themselves up from the floor in shock, they

are told that the ATO takes the same view. The ATO says that there has been

a transfer of the properties by the 3 children to each other for capital gains

tax purposes. Because their parents only paid $200,000 for each

townhouse, each child is liable to pay capital gains tax of approximately

$30,000 – $50,000 each (depending on their marginal tax rate).

Total tax, stamp duty and capital gains tax combined, comes to over

$150,000.

Could this problem have been avoided?

The answer is YES. It can be very easily avoided by a 3 generational

testa e ta t ust ill. Note: this is t the o l a to a oid this esult, but it is by far the easiest method.)

In the above example, a 3 generational testamentary trust will would have

sa ed F ed a d Ma s 3 hild e o e $ 5 , i ta . The ta ould ha e reduced from over $150,000 to NIL. Yes you heard correctly. NIL.

Under the law as it presently stands, a 3 generational testamentary trust

will reduce, and in many circumstances, eliminate, stamp duty and capital

gains tax. Your children are free to enjoy their inheritance without

interference or plundering by the government.

You pa e ough ta es i ou lifeti e. You do t a t ou lo ed o es to be paying taxes on your estate after you die.

Not only that, but if Fred and Mary have superannuation and life insurance,

by having a 3 generational testamentary trust will, Fred and Mary can elect

to have their superannuation and life insurance paid through the estate

rather than to each other.

How is this beneficial you ask?


EXAMPLE

Fred dies in a tragic car accident. Under his superannuation policy, in the

usual course of events, the trustee of the superannuation fund would pay

Mary the superannuation and life insurance (assuming Fred has made her

the nominated beneficiary of his policy). Mary would invest the money, and

pay tax at normal rates on her investment income. She could not distribute

the investment income to her children without significant tax penalties due

to tax laws which stop parents from splitting income with their under-age

children to save tax.

With a 3 generational testamentary trust will, if Fred had nominated the

estate as the beneficiary through a 3 generational testamentary trust will,

and made Mary the sole beneficiary of his superannuation, Mary can save a

substantial amount of tax. She would not only receive the funds tax-free as

a dependant, but could also distribute the investment income earned on her

superannuation to her under-age children without any tax penalty.

For e a ple, assu e Mar ear ed $ , per a u the ear after Fred’s death. Her marginal tax rate would be 40% (+ 1.5% Medicare levy). We will

assume that Mary has 3 children under 18.

If Mar ’s i o e fro i esti g her supera uatio as $ , , i the usual course of events, and if her 3 children were under the age of 18, she

ould ’t distri ute the o e to the hildre ithout pa i g pe alt ta (apart from $1,325 per child). Her tax bill would end up at approximately

$10,500. However, if she had a 3 generational testamentary trust will, she

could distribute the first $18,000 to her children tax –free. The balance could be distributed to her children at 15%. The result? Total tax payable

would be less than $2,000.

A significant saving!!

Using properly and carefully thought out estate planning can save

significant amounts of tax.


Family Court and Marriage Breakdown

The other important issue is marriage breakdown.

Statistics show that approximately 50% of marriages end up in separation

or divorce. Divorce is an important consideration in all estate planning,

especially to ensure that your estate does not end up in the hands of

undesired parties.

EXAMPLE

Fred a d Mar ’s ear old so Ale has a ast arriage reak up. Shortl after the marriage breakdown, Fred and Mary die from the stress of it.

U der Fred a d Mar ’s ill, their so Ale is e titled to $ illio of their assets.

Ale ’s e -spouse decides to go for everything that Alex has. In a standard will, in deciding how much goes to the ex-spouse, and how much goes to

Alex, the Family Court takes all the family assets into account, INCLUDING

THE ASSETS that Fred and Mary left to Alex in the will. In that situation,

therefore, so e of Fred a d Mar ’s assets a e d up ith the ast e -spouse. Is that what Fred and Mary would have wanted?

The above example shows what can happen.

It is certainly not what you would have intended for your children!

By contrast, if you have a 3 generational testamentary trust will, your assets

will usually be protected against the Family Court in relation to your child.

We say usually because the Family Court does have a discretionary power

to break a 3 generational testamentary trust. In practice, however, they

rarely use this power, and in cases where they have used it, it has been in

situatio s he e ou hild has do e so ethi g the should t ha e do e, e.g. shifted family assets to hide them from the ex-spouse.


Powers of Attorney

Let s also look at Po e s of Atto e …

A power of attorney is a very important document to properly protect your

financial affairs,

A power of attorney deals with your financial affairs while you are alive. A

will deals with them after you die.

Using our example of Fred & Mary, if Fred is overseas and must sign an

urgent document, if he has given Mary a power of attorney over his affairs,

Mary can sign on his behalf.

Or more importantly, if Fred has a car crash, and is incapacitated, if Fred

does t ha e a po e of atto e , ho ill look afte F ed s fi a ial affairs? Will it be Mary? Or an 18 year old government employee? It is not

his choice; it is the choice of a government authority.

By contrast, if Fred has a Power of Attorney, Fred and Mary can ensure that

Mary can look after Fred's affairs until Fred recovers. And vice versa if Mary

has given Fred a reciprocal Power of Attorney.


EXAMPLE.

One day Fred collapses at work with a brain tumour. He is raced to hospital

in a coma. A frantic Mary comes to the hospital and anxiously awaits his

fate by the bedside.

She is gi e i porta t do u e ts to sig o Fred’s ehalf. Horror of horrors! She a ot sig the . She has o Po er of Attor e o Fred’s affairs. She races to the Guardianship Board to go through an emergency

hearing for a few hours, leaving Fred in the hospital, not knowing whether

he ill still e ali e he she o es a k fro the heari g … This is a real live example that happened to a client not long ago.)

Mary also realizes she has to sell the house to put Fred in a home. Problem

is the o it / . She a ’t sell Fred’s share of the house ithout Guardianship Board approval.

And the Board ha e said the do ’t a t to gi e it.

Further, what if both Fred and Mary have a car crash or become of unsound

mind? Do Fred and Mary want an 18 year old government employee

looking after their finances? Or would they rather have their children, or

their siblings?


EXAMPLE.

Fred and Mary are seriously injured in a car accident. A big argument arises

between the 3 children (who loathe each other) as to who will take care of

u a d dad’s affairs. I disgust the Guardia ship Board gi e the po er to the Public Trustee, who start charging fees for each document they sign and

e er ti e the reathe …

By having a back-up power of attorney, Fred and Mary can appoint up to 2

people (in Western Australia; see us if you live in another State or Territory)

whom they trust to look after their finances and their children. In the

above example, Fred and Mary could have appointed a trusted friend or

sibling to take care of their affairs.


Summary

You can have a simple will or a 3 generational testamentary trust will.

There are 3 major benefits from a 3 generational testamentary trust wills:

1. Tax savings when shifting family assets.

2. Family court protection in the event of marriage breakdown with

respect to your loved ones

3. Bankruptcy protection if one of your kids goes bankrupt

To ensure your financial affairs are well handled while you are still living,

consider an enduring power of attorney.

If you have a partner, consider a back-up power of attorney.

Talk to an expert today to ensure your loved ones are properly protected.

We are happy to give you a no obligation fixed quote.

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