Everyone wants to be organised when planning their financial affairs for retirement. There are many types of structures that people can use including family trusts, self-managed superfunds (SMSFs) and commercial super funds. Family trusts can be overlooked in favour of SMSFs as a way of managing wealth due to the perception that they are overly complex and expensive – which isn’t necessarily true!
What is the difference between a family trust and a SMSF? A family trust is generally established by a family member for the benefit of their family and a SMSF is a form of fund that can offer members of the fund greater control over their retirement savings than is available through other type of superannuation funds such as industry or retail super funds.
The choice between a family trust and self-managed super fund should be made based entirely on what you what is going to work best for your family group depending on assets and personal choice.
Many people choose family trusts as they’ve got far fewer restrictions and rules compared to a SMSF and therefore are simpler to operate. Family trusts can provide tax advantages but may be subject to a family trust election (FTE). FTEs can result in adverse tax consequences if the trustee distributes outside the family group. Family trusts provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax tax-free thresholds and lower marginal tax rates. However, family trusts must distribute their profit to beneficiaries annually. It also provides a mechanism for multi-generational wealth transfer. Through your family trust ownership of assets such as a share portfolio or holiday house can continue on uninterrupted, even if a family member were to pass away.
In contrast, SMSFs are concessionally taxed at a maximum rate of 15%, depending on whether the fund is in accumulation or pension phase. SMSFs are also limited to a maximum of 4 members, which can be limiting for larger families. SMSFs must be finalised upon the death of the last member, which can raise tax issues. In some circumstances, if a SMSF member does not have an appropriate dependent, the superannuation benefits must be paid out as a lump sum on their death, which also has tax consequences. It also means assets held by a SMSF must be sold and if the family wishes to keep that asset, such as property, they may be liable for stamp duty and conveyancing costs.
Both family trusts and SMSF are great ways of planning for your retirement but both have their pros and cons. We advise doing your research first before making a decision on which structure you would like to take up as everyone’s circumstances are different. Some people’s circumstances will have a better fit with a family trust rather than a SMSF.
If you would like any advice which structure would suit you and your family please contact Grange Business Partners today!