Farming businesses can adopt a number of different business structures – but what is a discretionary family trust? And have you considered using this type of structure for your family farm?
Your decision on business structure is important, as you need to form a strong foundation for your farming family unit to build your business on.
The stronger the foundation, the better the business and the more likely you and your family will achieve your life-long goals.
Considerations for structuring a farming business
We are specifically talking about the structure that the farm business is built upon. A number of considerations need to be taken into account here, including:
- How are you going to handle the transfer of the management and ownership of the business to the next generation?
- How do you protect the farm business and assets during a divorce or a family dispute?
- What about planning for your retirement and financial security in old age?
- What can you do if faced by the financial pressure of a drought?
- What can you do in good years when there may be a large income tax assessment?
What is discretionary family trust?
One of the most popular options for farming businesses is a discretionary family trust with corporate trustees. This provides great flexibility in relation to asset ownership, dealing with trust income, and asset protection.
In such a trust structure, the assets of the family are held by the trustee on behalf of the trust beneficiaries or family members.
The trustee is responsible for the day-to-day activities of the trust. This involves making decisions about the assets and the undertakings of the trust’s business or investments. The trustee does this on behalf of the trust beneficiaries: the people (family members) who benefit from the income and assets of the trust estate.
We often recommend that our clients use a Pty Ltd Company as the trustee. This is because of the limited liability factor. Also, when it comes to family farms, the shareholding nature of the company, along with directorships, provides greater flexibility with controlled intergenerational succession.
This feature of discretionary family trusts is very useful and powerful when it comes to succession, asset protection, and estate planning.
In a trust structure, the assets are owned by a third party (e.g. a person or entity), independent of the owners. Independent trustees provide a range of advantages to families in that the assets can be owned on behalf of the whole family, as opposed to specific individuals within the family.
In a trust structure, family members can come and go as they wish.
Another important feature of a trust structure, when it comes to succession planning, is the ability to hand over of the day-to-day running of the farm to the next generation, without losing overall control.
Trusts also provide a very valuable form of asset protection. If you have a business that is subject to a degree of risk or financial exposure, it is best that the business is conducted via a family trust.
Should you use a discretionary family trust for your farming business?
Family discretionary trusts are common tool when it comes to estate planning.
They are also fantastic because they have the ability to stream various types of income to various beneficiaries in varying amounts, taking advantage of income distribution and tax planning.
This makes them a great option for many farming businesses. However, as with any business decision, the best option varies from case to case. It is always best to seek professional advice to suit your particular circumstances.
We are available to offer professional advice that ensures your family farming business has the strongest foundations possible.
