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How to protect your inheritance to vulnerable family members

Jul 11, 2017
How to protect your inheritance to vulnerable family members

Every family wants to make sure that their legacy, and the family business, is preserved and continues – in a tax effective and controlled manner. However sadly some family members are more vulnerable and the family legacy might be affected when it is controlled by these people.

This concept of care and protection for these family members has to take into account a multitude of sensitive matters. This is all the more difficult when that concept is combined with business and tax concepts.

At Westcourt we look at the following type of legal and tax structures to care for these family members.

1. Superannuation death benefits 

A superannuation pension can continue to be paid to children tax effectively.

If the superannuation pension is paid out of a self managed superannuation fund it is beyond the Superannuation Complaints Tribunal. Further, as the superannuation fund is not part of your estate the pension is not of your estate it is protected from claims that challenge your will.

This is important for blended families where the next wave of children are young with older siblings who might not have a strong bond.

And the tax benefit here is significant. A pension from an adult over 60 to a child can be tax free if structured properly.

Specialist care needs to be taken in the drafting of the pension commencement documents. This is to not only ensure that modern day tax benefits will arise but also to ensure the pension will be dealt with properly on death of the member.

2. Disability trusts
If a family member has a severe disability a special trust can be created to look after their future needs.

A significant benefit of funds invested in a special disability trust is that funds invested in a disability trust are not subject to Centrelink assets testing. Further their can be capital gains tax concessions if your transfer assets to a disability trust – especially if a house is transferred to the trust for use as a main residence.

3. Testamentary trusts
A testamentary trust is very popular. Instead of passing assets directly onto a child the assets are passed onto a newly created trust that the child controls.

A testamentary creates a tax effective outcome for children, allows family control and protects the legacy of the parents from outside attack (like bankruptcy of a child).

The primary benefit from a tax perspective is that the trust income can stream different types of income to different family members who can benefit the most (or pay the least) amount of tax on the distribution. Further, children who receive income from a testamentary trust are taxed at adult tax rates.

There’s also the concept that a testamentary trust can protect a child from a matrimonial attack. However the family court has quite wide powers and this protection, while still valid, requires a lot of care in the ongoing maintenance.

As a general rule the family court is seen as increasing their ability to look through a testamentary trust.

4. Protective testamentary trusts
Some children are better placed if control of the testamentary trust is not with them. This is often the case for children with addiction problems, who are incarcerated or family members who are infants.

In this instance the control is often with other family members who will act in the best interest of the child. Alternatively the control can be passed onto a trustee company who are licensed to act as an investment trustee company.

The tax benefits previously outlined for a testamentary trust also apply to protective trusts.

Of course with any decision involving your family business you need to ensure you have an independent business, tax and legal practitioners working together to generate the best outcome.

For more info on estate planning or protecting your inheritance, get in touch with our expert advisors.



Category: Family Owned BusinessPopular

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