There are many advantages to owning shares in a company through a trust, including tax planning and asset protection benefits.
Watch this video to learn about what a trust is and why you should consider having one if you run a business.
VIDEO TRANSCRIPT:
This is Amal.
She’s launching her new business, a food delivery service using drones.
She’s structuring her business as a company where she will own some of the shares.
But before she can go any further, she needs to think about how she’s going to own the shares in her company.
How she owns her shares is important because it will affect how much tax she needs to pay and whether she can protect her shares if something goes wrong.
Amal could own her shares in two ways.
She can own them as an individual, or she can own them through a discretionary trust.
We’re going to look at why and how Amal might own her shares through a trust.
But first, what is a trust?
A trust is a legal relationship where one person or organisation, called the trustee, holds assets for the benefit of someone else.
These assets might be property, income, or, in this case, shares. the trustee will own them. This means that if you have a business partner, they can have their own trust to hold their shares.
Owning your shares through a trust makes sense for a couple of reasons.
Firstly, the trust can help you manage how much tax you need to pay as an individual.
When Amal’s company makes a profit, she can then choose to give shareholders some of the profit, known as dividends.
If Amal personally owns her shares, she will also receive these dividends as a shareholder, and they will be considered part of her personal income.
It would be added onto any other income that she is earning such as her salary.
As a result, she will be taxed at her individual marginal tax rate, which will likely be higher.
But if Amal owns the shares in her company through a trust, the dividends will be paid through the trust. the money from the trust to herself or other people, such as her family.
The trust doesn’t pay tax; instead, Amal will pay tax only on the amount of money that’s distributed to her through the trust.
In this case, as a trustee, Amal gives some of the money coming through the trust to her partner, Maya, which helps with their tax planning.
Secondly, a trust can also help protect your shares if something goes wrong.
For example, Amal is a director of her company.
She enters into a contract to supply her business with drones.
But when the delivery arrives, she realizes that she doesn’t have enough money to pay the bill.
Operating your business when it can’t pay its debts is a breach of directors’ duties.
If you reach your directors’ duties, you may be personally responsible for paying off your company’s debts.
This means that the supplier can sue Amal and take her personal assets, such as her car, to pay off the company’s debts.
The supplier cannot take Amal’s shares as the trust protects them.
So, a trust may be a great way for Amal to own her shares in her company, but how does a trust actually work?
Firstly, there is a trustee.
The trustee is the person who manages the trust and distributes the funds.
It’s a good idea to create a corporate trustee, which is a company that acts as the trustee.
Legally, the company is in control of the trust, but in reality, you are the person making decisions going to the bank and signing documents as director of the trustee company.
Secondly, there are beneficiaries in a trust. The beneficiaries are the people that can receive money or assets from the trust.
The beneficiaries will likely be you and your family members, or anyone else you choose to give money to.
Setting up a trust is a complex process, but it can be an effective financial strategy to consider as a business owner.
After beginning my career as a Financial Planner 20 years ago, I have learnt the importance of a holistic financial planning.
Holistic financial planning is a comprehensive goal-driven, top-down approach that takes into account an individual’s complete financial picture, including their values, goals, risks, and experiences with money.
It’s a top-down approach that employs the 5 pillars of wealth planning. Rather than focusing on planning for individual life stages or using a product-based approach, holistic financial planners take every aspect of client’s financial life and financial risk into account. The key factors of holistic financial planning include:
I strive to advise clients to embrace the collaborative effort essential to holistic financial planning.
