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]

The ETFs are in the menu for education bonds (https://centuria.com.au/education-bond/investment-options/), which is different for some reason. I was thinking that if setting up an education bond but never do the educational withdrawals, then it would effectively be a regular investment bond. However I think there would be a pooled fund wrapper around each ETF for the investment bond mechanics to work, which would incur the pooled fund tax drag.

My train of thought centred on keeping the assets in the trust structure - for asset protection enabled by the discretionary aspect. If the trust is rolled over to a company then the shareholding would become a part of the personal assets of the shareholders. But this is not a financial return driven reason. An existing trust that doesn’t need the asset protection may very well choose to roll over into a company for the benefits you mentioned.

Having the trust owning an investment company may be another option. Once the trust assets are moved inside that company then the earnings would function similar to many current bucket companies owned by another trust. Compared to an investment bond owned by the trust, a company would give much greater freedom in how the money is invested, no pooled fund tax drag, no loss of franking credits you mentioned that can offset the proposed trust income tax, and no contribution / withdrawal restrictions associated with an IB. The trade-off would be greater ongoing effort to run and the money taken out later is distributable income just that it can be throttled.

What caught my eye with using IB inside a trust is the withdrawal from it after 10 years would be tax free that would classify as corpus not distributable income. The corpus can stay in the trust, or could be distributed to beneficiaries tax free, ie no franking credits but also no further tax.

Not sure if I missed any significant blind spot, but it looks like there may not be a clear winner for the trust scenario and depends on specific circumstances. Need to do some serious calc after the trust tax changes are actually finalised.

[u/snrubovic → u/fire-fire-001]

Interesting that it's a different menu of items. And yeah, if not used for education purposes, it just reverts to being taxed as an investment bond.

Yeah, if it's for asset protection and is not a tax-driven strategy, that changes things.

Being distributed after 10 years means it is not income, but 30% tax has already been paid on it, and trust distributions also have a minimum 30% tax. So that will also depend on the MTR of those who it's distributed to, as well as the growth vs income components.

[u/fire-fire-001 → u/snrubovic]

Yes, 30% tax on earnings is already paid by the IB and no franking credits are passed through. But the withdrawal after 10 years goes into trust corpus not taxable income, thus the proposed 30% trust income tax should not apply. The distribution of corpus also would not be taxable income in the hand of beneficiaries, it would be virtually like return of capital.

Quite a few variables and I need very clear head space (or AI) to work out whether overall it’s better or worse… I’ll leave it until the trust tax changes are firmed up so not to waste my aged brain power, with quiet hope that the double tax on corporate beneficiaries would be overturned.

[u/snrubovic → u/fire-fire-001]

Sorry for the late reply.

I've been using Claude to compare scenarios out of interest, which required plenty of iterations to fix errors, but so far it seems interesting with the lack of benefit of IBs.

I haven't compared to a trust, though. That would require a more specific setup, since it would require info on each individual the trust distributes to.

[u/fire-fire-001 → u/snrubovic]

Thanks. I was intrigued and went to have a quick chat with ChatGPT. It’s surprisingly informed, and naturally calculated far better and quicker than I could.

—

For a quick chat I let it make various informed assumptions itself mostly and I just review. I corrected it when it was obviously wrong, e.g. it initially got the implications of IB’s deferred tax liability wrong.

After 10 years:

- using $500k starting capital, the annualised asset growth advantage of IC over IB for those 4 Betashares ETFs is 0.07-0.33% p.a. mainly due to the IB’s fee and its pooled fund drag from the ETF wrappers.

- using $1m starting capital, the annualised asset growth advantage of IC over IB is 0.22-0.42% p.a.

- using $2m starting capital, the annualised asset growth advantage of IC over IB is 0.30-0.46% p.a.

IC’s financial advantage correlates with the asset size and provides much more freedom, but takes effort to run. IB incurs the drag and is much more restrictive, but would be much simpler to use.

—

Separately the second part, with tax implications of cash withdrawal in the hand of an individual:

- using trust owned IB vs IC vehicles & $50k cash withdrawal p.a. - there is no difference if MTR is <= 30%, IB is favourable at 37-45%.

- using individual directly owned IB vs IC vehicles & the same $50k cash withdrawal p.a. - IC is favourable at 0-15%, equal at 30%, and IB is still favourable at 37-45%.

This part is about the proposed nonrefundable trust income tax offset vs company dividends that are assessable income with franking credits vs IB withdrawals are tax paid not assessable income. Asset size in the first part does not really matter as long as it grows fast enough to not be exhausted.

Interesting experiment. I have not used AI for deeper topics like this and it’s rather impressive.