Introduction to Trusts

We start off the first blog with trusts, the quintessential structure providing flexibility in any cryptopian’s tax affairs.

A trust is a fiduciary arrangement where one party, known as the trustee, holds assets on behalf of another party, the beneficiaries. The trustee/s are essentially the bosses that run the day-to-day operations of the trust and can be individuals or a company. Trusts are versatile entities often used for asset protection, tax effectiveness, and estate planning.

In the realm of cryptocurrency, trusts such as Discretionary, Unit, and Hybrid Trusts can play a pivotal role. For this blog, we will be focusing on the Discretionary Trust subclass, also commonly known as a Family Trust, as this is the most popular structure amongst Trusts for private group settings. Trusts are unbounded by what they can invest in, which makes the structure quite popular with the crypto and other bleeding edge industries.

Fun fact: the typical life span of a trust is around 80 years (unless you are in South Australia – in which case, it is infinite). This can impact on your succession planning strategies for your crypto assets, so it is something to be aware of.

Advantages and Disadvantages of Using a Trust

Using Trusts in the crypto space can offer significant asset protection, shielding crypto and other holdings from potential creditors and legal disputes. Not only is it untouchable by business risk, but it also absolves risk at the individual level. It is truly unhinged.

They also allow for tax flexibility; the trustee can distribute income in any manner they wish to appropriate beneficiaries, potentially reducing their overall tax liability from a family group perspective.

Interestingly enough, it can also be hard for the beneficiaries of a Family Trust to bring a claim against the Trustees of the trust as they only have a right to be considered. Typically, this is why we recommend that Trusts are reserved for family you trust (the secrets in the name, you need to have Trust).

Another upside is that trusts can stream certain types of income, which provides more flexibility in terms of making tax effective distributions. This gives your staking rewards and other DeFi income more options.

One other major advantage is that any CGT assets sold after 12 months can be discounted and distributed to those who are eligible for discounting. This means you can reduce the gross capital gain after prior year losses by 50%. Great for long term HODL gains. 

From a succession and estate planning perspective, Trusts are not estate assets; which means they do not form part of your will. This means that you can hard wire clauses into the trust deed so that your crypto wealth is passed on via control of the trust to intended beneficiaries. 

There is also another role called the Appointor, which is to fire and hire trustees. This is where the fun can begin with succession planning.

However, the complexities of trust management and compliance can be a downside, requiring diligent administration and understanding of tax implications. I suppose this is where you will need to find the right crypto tax partner 😉.

One disadvantage with a trust is that it cannot retain profits, therefore, any trust income needs to be distributed every year. What this means in practice is that each financial year, a trust distribution minute needs to be drafted before the end of the financial year so that an effective enforceable trust distribution has been determined.

If this is not done by 30 June each year, any trust income is taxed to the trustee at the highest marginal tax rate! Ouch! One point of clarification here is that the cash doesn’t necessarily need to flow before 30 June – the net income distribution to beneficiaries will create present obligations to the trustee to pay the cash out (it is a debt).

One common misconception is that a trust does not get taxed. To bust this misconception, it’s the beneficiaries who will ultimately get taxed as the trust is simply a vehicle to pass on any income/profits to the beneficiaries.

Trusts are one of the more complicated structures and with anything more complex comes more focus and attention to ensure it is administered correctly.

Let’s cover a couple of scenarios to demonstrate the effectiveness of Trusts.

Case Study 1 – Use of family members

Consider the scenario where a Brisbane-based investor, Brian, who is 40 years old and looking to invest into the crypto space as a means of diversifying his current portfolio as he has recently paid off his home and wanting to build further wealth. Brian and Cassie were fortunate enough to invest early to acquire their first home at 20 from the support of their parents and are effectively debt free. The house is worth $1 million.

Brian is a senior Architect and team manager earning $200,000 as a wage per annum. He has a spouse Cassie, who is an artist earning minimal income. Brian has identified proof of stake cryptos to invest in where he plans to hold for the longer term and stake to derive a yield to generate a passive income.

He makes an equity pull from the home loan over 30 years at their current mortgage rate for $400,000 and on-lends this to a Family Trust and derives $40,000 in staking rewards for the year.

Through the use of a Family Trust to manage their crypto portfolio, Brian distributes all of the staking rewards to Cassie (who is in the lower tax bracket) instead of himself personally thereby minimising his tax burden. By this simple action alone he can save around $15,000 in taxes, showcasing the strategic advantage of this structure in managing cryptocurrency investments. Funds are returned from the beneficiaries in the form of loans and the trust continues to stack!

Casy Study 2 – Streaming of income

In another scenario demonstrating the usefulness of a trust; we have Anabelle who is a director of a crypto venture capital company earning around $150,000. She has a Family Trust who has invested privately into the venture fund and has stacked early into Solana when the project initially seeded. She has parents who are retired and receives funds from super pensions (self-funded) and a spouse who had to sell his previous small business for a capital loss (earning similar income to her).

During the year she receives a fully franked dividend from the venture fund of $100,000 and she decides to take profits on the Solana seed investment making a capital gain of $200,000. 

In this case, an ideal distribution would be to stream trust capital gains to her spouse with the capital loss whilst streaming the franked dividend to the lower income beneficiaries (being her parents), who will potentially obtain tax refunds from the franking credits attached to the dividends. This strategy has the potential to save 10s of thousands of dollars whilst receiving a tax benefit from the ATO (they have to pay you money!).

This is a key reason why we offer EOFY tax planning sessions as they are important to ascertain what distributions are to be made prior to 30 June depending on the activity for the investments in that year.

Conclusion

Trusts can be an excellent way to manage and protect cryptocurrency assets, offering notable tax advantages. However, they require careful setup and ongoing management. Consulting with Brisbane’s best crypto accountant, we can provide tailored advice, ensure compliance, and maximise  your benefits of using a trust for your crypto assets. If you're considering setting up a trust, it's crucial to take the right steps to ensure it aligns with your goals and tax obligations.

Click here to schedule your consultation and take the first step towards savvy and secure crypto tax structures.