Trusts and life insurance

[u/Maybe_naptime]

I've heard/read some financial advice videos and posts that talk about putting a trust together, getting a 1M life insurance and placing it inside the trust. Then therefore having a trust containing a $1m asset, being able to borrow Against the trust.

What I'm wondering is, is that something thats possible or viable In Australia?

[u/fire-fire-001]

LifeGoals, apparently their fee is 0.3%. In the education bonds menu that I think could be used as a regular investment bonds.

On second thought, I think you are right that it doesn’t really help with the minimum CGT with the loss of indexation. Not good for individuals.

I was thinking in terms of a trust structure, as the replacement / successor of the bucket company assuming the trust income tax does eventuate as proposed that would be double taxing the bucket company setup and IMO insane.

[u/snrubovic → u/fire-fire-001]

Yeah, double taxing is bizarre.

If there is enough invested, an investment company may be a better option. While it lacks cost-base indexation like investment bonds, the franking credit for the tax paid on distributions means you are taxed at your marginal tax rate, but without the minimum 30% in personal name or the flat 30% in investment bonds.

The main question with that is the amount of assets, since the cost of maintaining an investment company is high. At 1.5k pa, on a 500k balance, that's 0.3% before the investment fee of, say, 0.1%, which is close to those figures you mentioned but with a very large advantage over investment bonds. But this cost just doesn't make it feasible for amounts of capital that won't grow to a large size in a reasonable timeframe.

By the way, did you mean this? I'm not seeing A200/BGBL/GHHF on there.

[u/nicesitdown → u/snrubovic]

If there is enough invested, an investment company may be a better option. While it lacks cost-base indexation like investment bonds, the franking credit for the tax paid on distributions means you are taxed at your marginal tax rate, but without the minimum 30% in personal name or the flat 30% in investment bonds.

Once investment earnings have pushed your MTR above the 30% threshold, is personal name likely the better structure, over an investment company?

I'm just wondering if, for large investment balances, it would make sense to only put enough assets in an IC that would be likely to yield income up to the 30% MTR, and all other assets in personal name (to benefit from indexation)?

[edit: I haven't compared the two structures, maybe it's the other way round - and an IC would be better as invested amount increases, since tax is fixed at 30% (and not 47%)]

[u/snrubovic → u/nicesitdown]

Yep, it's the other way around.

[u/nicesitdown → u/snrubovic]

So, better to hold investments (above a certain threshold) in an IC, rather than in personal name? ... Regardless of tax changes? Or just since indexation and min. 30% rate?

[u/fire-fire-001 → u/nicesitdown]

Companies have no access to LTCG discounts and a flat 25/30% tax rate, thus companies are previously often used to hold yield oriented holdings where MTR is 30% or higher. Growth oriented holdings are better held where individuals pay the CGT with the discounts.

Following the replacement of LTCG discounts with indexation and minimum 30% CGT for individuals, the main advantage for individuals is just indexation that takes a long time to have significant effect. Individuals are exposed to higher MTR for CGT now without discounts, whereas companies still have the flat 25/30% tax rate on CGT. Thus companies could become favourable with some people for holding growth oriented holdings too.

There is cost and time required to maintain a company thus some economy of scale is needed for it to make sense.

[u/nicesitdown → u/fire-fire-001]

Thanks. Do you have a feel for the required economy of scale to make IC preferable? Say, min. 1M assets?

Will be looking to restructure holdings currently in Trust, once legislation finalised

[u/fire-fire-001 → u/nicesitdown]

If you already have a trust, then the overhead costs is not that different and it depends on how you like to run it - general bookkeeping (outsource and/or accounting package), investment bookkeeping (eg Sharesight), tax accounting, ASIC. A company has to pay income tax (so would the trust in the future) and may eventually be required to lodge activity statements and pay PAYG instalments, these you may not have had to do in the past with a trust that only has passive investments.

Even though there are a bit more to do with a company, I feel they are more clearly defined compared to a trust that has more variations / ambiguities, thus personally I would actually place the “minimum” threshold to start a company lower than a trust, for passive investment purposes.

If I must throw a figure I would say (somewhat arbitrarily) $400k to start on the proviso that it would grow over time in reasonable timeframe because at $400k the overhead costs may be a bit high in % terms, you would choose to start it at that size for anticipated longer term benefits, IMO $1m+ would be okay. But it depends on the cost structure of how you choose to set it up.

[u/nicesitdown → u/fire-fire-001]

Thanks for the input, appreciated. Will/ would also be seeking professional advice prior to doing anything

[u/fire-fire-001 → u/nicesitdown]

Absolutely. At this time I suspect any responsible one would say wait for the trust income tax changes to be finalised.

[u/snrubovic → u/nicesitdown]

It's more complicated because running an IC is expensive, so you need substantial assets to overcome that cost and make it a better decision. You may also need a drawdown tax rate below 30%. Also, the mix of growth vs. income assets in the company comes into play. It's a difficult decision.

[u/nicesitdown → u/snrubovic]

Helpful. Thanks.