Are Trusts still relevant for the Medical Professional?

Trust Law has been around for many hundreds of years and dates as far back as the early 1500’s when Knights going off to battle would entrust estates with Trustees for the benefit of beneficiaries in the Court of Chancery, England.

It was Henry VIII who passed legislation known as the Statute of Uses in 1535 that attempted to abolish trusts due to the fact that lawyers where using them as a means to evade tax.  Ironically, after all these years it would seem that not much has changed today, although it is getting harder.

Historically, having a trust that earns income and holds assets has proven to be an extremely popular vehicle for a business or investment portfolio due to their asset protection properties and ability to stream or allocate income to different types of beneficiaries.  From the perspective of a medical professional, trusts have been a very attractive proposition, particularly in the areas of protecting hard earned assets from ‘would be’ suitors and creditors in our ever growing litigious society.  They have also provided opportunities to channel or direct income to lower income tax beneficiaries, while at the same time providing for schooling, university and other associated family costs.

But is this all still the case?

In more recent times there have been quite a number of changes in the area of Trusts and Trust Law, from government legislative changes to decision outcomes tested in the courts that have drastically altered the way trusts are now administered.  This has resulted in the need to review the structure regularly to ensure it is complying with the new laws.

Some major changes include:

Minor Beneficiaries

Previously beneficiaries under the age of 18 could be distributed up to $3,333 each from a discretionary trust without any penalty tax implications.  For a family with four children this could be quite a tax saving! However, it was announced in the 2011 Federal Budget that the maximum distribution was to be reduced to $416 per Minor Beneficiary, leaving a big question-mark for the trustees of such a trust.

Bamford’s Case

A much talked about High Court case known as “Bamford's Case” tested the way in which a trustee of a trust could distribute income to its beneficiaries and how this income was to be determined.  This decision means that every care should be taken when determining and distributing income to beneficiaries of trusts to ensure the income of the trust ultimately ends up where it is intended.

Richstar’s Case

In 2006 the Federal Court case of Richstar went against conventional asset protection and trust law.  It effectively ignored the trust that was in place, and looked at the Trustee and the beneficiary as one and the same.

Legislative Change

Until recently, a trust distribution could be made whilst completing your annual trust tax return.  Now, the ATO has introduced laws that require all trust distributions to be made prior to 30 June each year, ie. for a trust distribution to be valid in your current trust tax return (year ended 30 June 2012) the distribution would have needed to be made before June 30 2012. The ATO are even issuing request letters to Trustees asking them to forward copies of resolutions to prove their validity.

In addition, the ATO has introduced new ‘Beneficiary Tax File Number Reporting Rules’ that, if not adhered to, will result in penalties of $2,200 to trustees who fail to comply… more red tap, and many professionals are not aware of this.

So the question is, with all this complexity and constant change, does there remain any benefit for the medical professional in either establishing or maintaining a family trust?

The short answer is, "Yes!"  There are still many valid and effective reasons for establishing a trust as part of your portfolio.  It is not, however, a one size fits all approach and depends very much on the family structure and the type of assets & property in the trust… and getting it wrong can be likened to using a band aid for a broken leg… it can hurt for a very long time.

If you have a trust structure already in place it is our strong recommendation that you have it reviewed by a professional to ensure you fully understand and are meeting your obligations with the workings of the trust.

If you are thinking of establishing a trust or wonder whether a trust would be beneficial to your particular circumstance, please seek appropriate advice from a specialist firm who understand the medical profession to avoid future headaches.