A Discretionary trust is one of the most sought after trust structures in view of the enormous benefit that follows from the establishment of such a trust. The Discretionary Trust structure creates a framework for family assets to be passed from one generation to another without losing control over key assets, allows for the protection of assets from creditors, creates an effective tax structure and in particular allows access to Capital Gains Tax (CGT) concessions.
Purpose of Trust Cloning
Trust Cloning occurs when a new trust is created which has the same beneficiaries and terms as the existing trust thereby creating a clone or replica trust. The assets of the earlier trust are transferred into the new trust. Traditionally this would have attracted CGT in view of the disposal of the assets of the trust but under the trust cloning exception CGT will not be imposed on the transfer.
In recent years the practice of trust cloning has been widely used by individuals and entities for the purpose of asset and business risk protection, family succession planning and wealth preservation. A trust carrying multiple business activities may be able to separate its business activities into different trusts thereby reducing the risk of exposing the entire assets of the business to meet the liabilities of the businesses. In the area of family succession planning, trust cloning will ensure that passive assets are transferred to family members without being subjected to the payment of CGT, as a mere change of trustee does not invalidate the trustee’s cloning exemption.
Trust cloning is not to be confused with the splitting of trusts. Trust splitting is all about control whereas cloning is about the establishment of a new replica trust. Importantly, the transfer of assets between the original and replica trusts may not result in a CGT liability because it does not amount to a CGT event due to the trust’s cloning exemption. Replica trusts are also important not only because of the treatment of income but because of the ability to make in specie distributions as and when required. The separation of capital and income may in some cases be important for a number of reasons including asset protection and therefore the ability to enjoy income sometimes at lower marginal rates.
Under the exemption any CGT assets transferred retain the same acquisition date and cost base as under the original trust. The importance of this aspect and its relevance to succession planning should not be overlooked. Why anyone who has more than $1M of assets would ever contemplate relying on a simple will to pass their assets to their beneficiaries is beyond reason. Perhaps penny-wise and pound-foolish sums it up. Financial planners are at risk because many of them do not do enough to explain that this needs to be done. After all they have become the custodians of the nation’s wealth in many cases thereby bearing the responsibility of ensuring that their clients are properly informed of this.
What about CGT?
Capital Gains Tax is the tax you pay on any capital gain which is reflected in your returns and is levied on the difference between the capital proceeds and the cost base of your asset e.g. the profit from the sale of the asset. Capital Gains Tax comes into play when a CGT event happens and the most common CGT event happens when disposal of assets takes place. If trust cloning is not done correctly there will be CGT consequences e.g. under CGT events A1, E1 and E2. To obviate the consequences of doing this you should seek proper professional advice from LAC Lawyers.