Research: Advantages and Disadvantages of Trust - Business Law Assessment Answers

Research - Business Law Assignment Help

Task 2 Research

What you have to do:

2. You must read the information in the scenario below carefully.
3. You should visit the following links for useful information:
4. Research the topic and any relevant statute and case law.
5. Collect, collate and present the client's relevant personal and business information from the details below for your evaluation and analysis.
6. Identify and describe any additional information you would seek.
7. Describe any specialist advice you may seek and from whom, explaining your reasons so as to best advise the client and limit potential liability.
8. Irrespective of your answer to point 6 interpret, analyse and process the available information to obtain and provide the required basic knowledge for client's business structure requirements.
9. Analyse how legal issues and risks impact on the range of different types of legal entities that may be relevant to your client’s particular following needs:

   a) the legal nature of a trust and its advantages and disadvantages;

   b) the basic characteristics of different types of trust including bare , fixed discretionary or testamentary trusts;

   c) special disability trusts;

   d) the ways in which superannuation can be accumulated including self-managedsuperannuation;

10. e) advantages and disadvantages of superannuation and different types of superannuation funds;
11. f) how superannuation interests are protected.
12. Review your client’s circumstances and provide a relevant, correct and coherent advice to the client/s, identifying any type of trust or special trust/s that may be suitable for them and/or form of superannuation that may best suit their personal circumstances.
13. Detailed financial or tax calculations or spreadsheet presentations are not required although some general understanding of income tax thresholds and rates of income tax may be relevant in providing correct advice.
14. Correctly cite relevant legislation and decided cases if relevant.
15. Provide a compulsory and satisfactory bibliography displaying evidence of research of up- to- date relevant statute law or cases or textbooks or articles using either the Harvard Referencing Style or the APA Referencing Style as outlined on the OLS website.
16. Provide a written advice in the form of a report to your clients in no more than 1500 words excluding the required bibliography in the form of a word file.
17. The advice does not have to be addressed but is obviously aimed at fulfilling your clients’ needs.

Introduction:

The case analyzes the tax advantages savings options available for Andrew and Patricia. There are different types of tax advantaged savings options present for the case of Andrew and Patricia and the most important tax advantaged savings for the couple are trusts and superannuation. Trusts are considered as the fundamental elements of the planning of business financial affairs, family financial affairs and investment. Though, the trusts are very common but often they are misunderstood. A trust is not defined as a separate legal entity or business but it is basically a relationship which is enforced and recognized by the court in regards to the equitable jurisdiction. There are many countries present that are not aware of the actual meaning of trust and it is often misunderstood in these countries. Though, the concept of trust is originated in the English law, there are many European countries present too which do not have any concept of trust. A trust is basically a relationship in which A holds any particular property which can be of benefit of B (Donald, 2011). In this case, A is known as trustee and also the legal owner of the property who holds the property for the benefits of B. The trustee can be any individual, group or company. For any trust, there can be more than one or multiple trustees. The courts in Australia are very strict regarding the nature of the obligations of beneficiaries. As per the Australian law, the trustee is the legal owner of the property but the property can only be used for the benefits of the beneficiaries.

Advantages and disadvantages of trust:

As it can be identified from the case study that one of the children of Andrew and Patricia is disabled, creating a trust can be a good option for them. But, before proceeding further, it is important for the couple to understand the advantages and disadvantages of the trust. The main advantage of the trust is that the couple can have limited liability if they appoint a corporate trustee. Secondly, the structure of trust can provide more privacy to the couple compared to a company. The third advantage is that there can be flexibility in the distributions among the beneficiaries (Newell, 2006). Fourth advantage is that the income of trust is usually taxed as income as an individual, not as a company which is highly beneficial for the couple because they want to save taxes and it can be the best way for this as in case of Stickney v. Keeble [1915] AC 386.

There are some disadvantages of trust as well which Andrew and Patricia should be aware of. The first disadvantage of trust is that the structure of a trust is more complex compared to a company. Secondly, the trust can be more expensive to establish and maintain compared to a company. The third disadvantage is that various types of problems can be encountered when borrowing funds because of the different complexities of the structure of loans (Bryan, Ham, Rafferty, & Yoon, 2009). The last disadvantage of constructing a trust is that powers of the trustees are highly restricted by the deed of trust.

Keeping the advantages and disadvantages of trusts in mind, the couple can develop the trust for their children.

Basic characteristics of different types of trusts:

There are different types of trusts present which the couple should be aware of. They are:

Fixed trust: As per the Conveyancing Act 1919 (NSW), in this type of trust, the trustees hold the assets of the trusts for the benefits of some specific beneficiaries in specific proportions. In this type of trust, the trustees do not need to exercise the discretion because the beneficiaries are automatically entitled their fixed share of the trust and the income generated as per their share (Drew, 2003).

Unit trust: Unit trusts are usually fixed trusts in which the beneficiaries and the interests of the beneficiaries are generally identified according to the units they hold in the similar way in which the shares are issued to the shareholders of the companies. In this type of trust, the beneficiaries are referred as the unitholders (Rice, & McEwin, 2002). It is very common for the properties, joint ventures and investment trusts. The beneficiaries of the unit trusts can transfer the interests of the trusts by selling the units to another buyer. As per the law, no limits are there for the number of trust holders but the taxation treatment might vary based on the activities and size of the trust.

Discretionary trust: The discretionary trusts are often regarded as the family trusts as they are generally associated with the asset protection and the tax planning of the family members. In case of this type of trusts, the beneficiaries do not have any specific interest on the income of the trust but the trustee of the trust has the freedom to determine whether the beneficiaries should get capital or income from the trust (Drew & Stanford, 2003). But, the main aim of this type of trust is tax saving and for this reason, the trustee has a greater control for the disposition of the income and the assets as the interest of the beneficiary is considered for exercise of discretion.

Testamentary trust: These trusts are usually come to action after the death of the testator. In this type of trusts, the trusts are set depending on the will of the testator and if the testator wishes to provide the trust to their children who have not reached the adulthood yet or who are handicapped (Traves, 2010).

Another good option for the couple to take care of their children in future is special disability trust. The special disability trusts are established by the parents of the children or the family members aimed at taking future care and the needs for accommodation to their children with severe disabilities in future (Drew & Stanford, 2003). There are a number of benefits present of the special disability trust for the couple. The first benefit is that there is a gifting concession present which is up to $500,000 available for the eligible family members of the main beneficiary and there is also an asset test assessment discount up to $647,500 which is also available for the principal beneficiary (Australian Taxation Office, 2016). The couple can also get tax savings under this type of trust. The unexpected income of the special disability trust is taxed at the rate of an individual tax payer and higher marginal tax rate is not considered in this case (Drew & Stanford, 2003).

So, among the four trusts, the most suitable option for the couple is special disability trust or the testamentary trust. The special disability trust and the testamentary trust can help the couple to save money for their children as one of the children is disabled and they can also save huge amount of money which is paid as taxes.

Superannuation funds:

The superannuation funds of Australia work as the trusts. As per the Superannuation Industry (Supervision) Act 1993, the trust deed states the details of the basis of calculation of entitlement of each of the members and the contributions, if any, they have made for a member. There are some standards present which have been developed by the Federal Government which the trustees should comply with.

In case of the self managed superannuation funds, the trusts have the ability to borrow funds from different financial institutions and from other sources based on the instalment warrant arrangement (Australian Taxation Office, 2016). The transactions between the trustee of the superannuation fund and the financial institution is done in a particular way by development of a second deed with an independent trustee. The deed states the details of the process of borrowing funds from the financer.

Establishment of a trust:

According to the Superannuation Industry (Supervision) Act 1993, the trust can be established without any written document but it is always recommended by the law to establish the trust by a formal deed which is also known as the deed of settlement or declaration of trust. In case of deed of settlement, there will be an owner who will be responsible for transferring the property to any third party on a condition that the property is held by them on trust of the beneficiaries. In case of declaration of trust, the owner of a particular property declares him/her as a trustee of the property and they will work for the benefits of the beneficiaries.

The liabilities of trustees:

The trustee has liability for all the assets and debts of the trust and that is the reason why if the amount of liability is high for the trustees, a limited liability company can be established and it can be used as a trustee. The trustees are allowed to use the assets of the trustee to fulfil the liabilities.

Tax issues of trust:

In case of the trust formed by Andrew and Patricia, the tax rates will be calculated at the individual tax rates as one of the beneficiaries of the trust is disabled. In case of capital gains tax, if the trust can hold an asset for a period of 12 months then the capital gains tax will be calculated at 50% discounted rates.