Whether you are a founder of a business, an investor in a company or an employee who owns shares in a company, the shares you own can be a very valuable asset. It is, therefore, important to consider how you hold those shares to protect them and effectively manage any financial returns you receive from them. One of the most common methods of holding shares in a company is through a discretionary trust. This article will explain the advantages and disadvantages of owning shares through a trust and how to hold and transfer shares to your trust.
What is a Trust?
A trust is a legal arrangement where a trustee holds and manages assets for the benefit of the trust’s beneficiaries. A trustee can consist of one or more individuals. Alternatively, a trust can also be managed by a company. The trustee who is in charge of managing the trust, in this case, is known as a ‘corporate trustee‘.
The most common type of trust which people will use to hold their shares is a discretionary trust. These are often referred to as ‘family trusts‘. Discretionary trusts allow the trustee to have discretion in how they distribute trust income between the beneficiaries. Another type of trust is a ‘unit trust’, where the beneficiaries have a specific or fixed entitlement to receive trust income.
Advantages
There are many reasons why it can be useful to hold your shares through a trust, including for:
- tax planning;
- tax benefits;
- ease of succession; and
- asset protection.
Tax Planning and Benefits
Generally, if you hold shares personally, any income generated from those shares, such as dividends, will be subject to income tax at your personal marginal tax rate in the income year in which the dividends were received.
By contrast, if those shares are held via a discretionary trust, the trustee can distribute income to the beneficiaries at its discretion. This means that if the trust’s beneficiaries include individuals (such as family members) taxed at a lower marginal tax rate, the trustee can distribute the income derived from the shares to those individuals. This is beneficial because it allows you to distribute income from the shares in the most tax-optimal manner.
Another advantage of discretionary trusts relates to capital gains tax (CGT). Typically, when shares are disposed of for a profit, a “CGT event” occurs, and CGT is payable on the capital gain amount. If the trust has owned the shares for at least 12 months before they are sold, a 50% CGT discount usually applies to any CGT payable due to the disposal.
It’s important to note that tax benefits are not realised by the trust itself but rather by the trust’s beneficiaries.
Ease of Succession
Additionally, trusts can be useful tools in family succession planning, as the settlor can facilitate a controlled transition of wealth to future generations.
Once a trust is established, it effectively divests the settlor of direct legal ownership over the assets settled into the trust. As a result, upon the settlor’s death, there is no requirement to undergo the probate process or similar formalities to facilitate the transfer and administration of the trust’s assets. This allows for an efficient mechanism to transition the ownership interests vested in the trust to designated beneficiaries following the settlor’s passing while circumventing the delays and costs typically associated with probate proceedings.
Consequently, trusts provide an advantageous vehicle for ensuring the seamless intergenerational transfer of wealth in accordance with the settlor’s wishes.
Asset Protection
Separating legal ownership between personal and trust-held assets is a significant advantage of establishing a trust. While historically founded as vehicles to insulate assets from risks, trusts have evolved to serve the modern need of securely holding assets in politically stable jurisdictions. These sophisticated arrangements are integral to comprehensive financial and estate planning, particularly for high-net-worth individuals, multi-generational families, and corporate entities. Trusts function as robust defensive shields, protecting the wealth from potential liabilities such as overreach from punitive tax regimes.
For instance, shares or other assets held via a trust may benefit from enhanced protection from creditors compared to those held personally. This degree of insulation is further reinforced when the trust is administered by an independent, professional corporate trustee rather than an individual. Establishing the trust effectively severs the direct legal chain between the party that created the trust (known as the “settlor”) and the assets forming part of the trust.
Continue reading this article below the formDisadvantages
Setting up a trust can have an additional administrative and financial burden. You will need to establish the trust itself and pay for the upkeep. For example, this could mean having an accountant assist you with the trust’s tax returns each year.
You should also be aware of the limits on tax planning through a trust. For example, tax income distributed to minors will generally be taxed at the highest marginal tax rate. The trustee will also be liable to pay tax at the highest marginal rate on any income that is undistributed at the end of the financial year.
How to Hold Your Shares Through a Trust
Broadly, holding shares gives you a portion of ownership in a company. For example, you and three other friends might decide to start a company and divide ownership equally. If there are 100 shares available, you and each friend will receive 25 shares. Normally, you might sell those shares in the future. Another option is to hold shares through a trust in your capacity as a ‘trustee’.
If you are being issued or transferred shares and you want those shares to be held by your trust, you will need to:
- inform the company that you will be holding your shares through a trust; and
- provide the company with your trust’s details.
The shareholder of the shares will be the trustee ‘as trustee for’ the trust. This is because a trustee holds assets on behalf of the trust. The phrase ‘as trustee for’ is often abbreviated to ‘ATF’.
For example, if you:
- are the trustee of your trust, the shareholder of your shares will be ‘Jane Smith ATF Smith Family Trust’; or
- have a corporate trustee, the shareholder of your shares will be ‘Smith Pty Ltd ACN 123 456 789 ATF Smith Family Trust’.
The company’s internal records (primarily its ‘register of members‘), ASIC records and share certificate will reflect the fact that the trustee is the shareholder of your shares. The company will also record in its register of members and on ASIC that the trustee holds its shares’ non-beneficially’. This is because the trustee holds the shares for the benefit of the trust, not for itself.
How to Move Shares Into Your Trust
If you want any existing shares you own to be held by your trust instead, you will need to transfer those shares to your trust.
You will need to inform the company that you intend to transfer your shares to your trust. This is so that the company can:
- update its register of members;
- issue you with a new share certificate reflecting that your trust now holds your shares; and
- notify ASIC of the change.
If the company you own shares in has documents that govern it (e.g. a company constitution and shareholders agreement), this may affect the process of transferring shares. Often a company’s constitution or shareholders agreement will require that shareholders first offer shares to other company shareholders for purchase before transferring them to a third party. This is because of shareholders’ ‘pre-emptive rights’. If this is the case, the other shareholders will have to waive their pre-emptive rights before you can transfer your shares to your trust.
Tax Consequences
Whenever you transfer shares, including to your trust, there may be capital gains tax (CGT) consequences. If the shares you are transferring to your trust are of high value, you should seek tax advice to understand whether the immediate tax consequences of transferring shares to your trust outweigh any long-term advantages.
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Key Takeaways
Owning shares in a company through a discretionary trust is very common and can have many advantages. Specifically, if you own shares through a trust, it will allow for greater tax planning flexibility than if you were to own them purely in your individual capacity. Furthermore, you may be entitled to capital gains tax. The ease of succession and asset protection is also far greater through a trust. However, setting one up can be a financial and logistical burden. Therefore, it is important to weigh up the advantages and disadvantages and consider whether it would be useful in your personal circumstances.
If you have questions about holding shares through a trust, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A trust is a legal arrangement where a trustee holds and manages assets for the benefit of the trust’s beneficiaries. A trust deed will typically govern the rules of the trust. There are different kinds of trusts, like fixed trusts, unit trusts, discretionary trusts, and charitable trusts, among others. For tax purposes, holding assets on trust can be beneficial.
The trustee of a discretionary trust can distribute income to beneficiaries who have a lower marginal income tax rate. This will minimise your shares’ overall tax liabilities. Additionally, if your trust holds the shares for at least 12 months, a capital gains tax discount may apply.
You will need to inform the company issuing the shares that you will be holding them through a trust and also provide your trust’s details. This is necessary to ensure the company’s internal records reflect this change.
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