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The Equiti Investment Trust

There are many different forms of trusts that are available for use as investment vehicles including discretionary trusts, unit trusts, fixed trusts and what is commonly referred to as ‘hybrid trusts’.

The term ‘hybrid trust’ is simply a name given to describe a trust that is specifically tailored, generally with features of both discretionary trusts and fixed trusts.

There are many forms of hybrid trusts available in the market place. The Equiti Investment Trust is a popular and tax-effective vehicle through which a family or specific individual can:

    • gain significant asset protection benefits;
    • gain direct assessable income from underlying trust investments;
    • provide a tax effective income stream to family members through connected and consistent estate planning measures;
    • conduct a private investment portfolio;
    • provide tax planning benefits;
    • hold equity interests in private business enterprises;

The Equiti Investment Trust has features of a discretionary trust coupled with a direct and fixed stream assessable income to specific beneficiaries which enables efficient estate planning, asset protection planning and tax planning for a family.

These benefits are highlighted below:

Asset Protection

The Equiti Investment Trust has many of the same asset protection benefits as a traditional discretionary trust subject to any specific rights of a beneficiary, or beneficiaries, to a fixed income stream. These rights are an asset of the beneficiary that holds them.

Also, subject to the operation of specific rules in legislation such as the Corporations Act and the Bankruptcy Act, acquiring and accumulating assets in the Equiti Investment Trust, like the discretionary trust, can protect those assets from any commercial risks that may otherwise face the beneficiaries of the trust.

An individual is a person at ‘commercial risk’ if, for example, they personally have financial exposure to creditors (e.g. they have loans in their own name or have guaranteed the loans of others) or if they may personally suffer legal actions being brought against them for negligence (e.g. professional persons), breach of duty as company director and the like.

Assets owned by an individual who is at commercial risk can be made the subject of claims brought against that individual by the trustee in bankruptcy or by a plaintiff with a legal action. Assets owned in a discretionary trust can often be protected from these claims.

The concept of asset protection is not just limited to commercial risks, the vagaries of personalities and families can be well catered for with the Equiti Investment Trust. A parent can leave an income stream to the benefit of an adult child but maintain the investment pool for the grandchildren. This can also be used for the blended marriage relationships where a lawful right to an income stream is to be directed to a second spouse and the assets set aside and maintained for others.

Indeed, the ability to split the income rights among a number of persons makes the Equiti Investment Trust unique in its ability to deal with unique family situations.

Personal family planning issues and concerns about future family law or de facto relationships can be addressed, at least in part with the proper employment of the Equiti Investment Trust.

The nature of a discretionary trust is unique in that none of the discretionary beneficiaries of the trust have any entitlements to any of the assets of the trust nor to any income of the trust unless the trustee of the trust exercises its discretion in their favour or, as is the case with the Equiti Investment Trust, a fixed income entitlement exists under the trust terms.

This fundamental feature of a discretionary trust is essentially why the Equiti Investment Trust is such an effective asset protection vehicle.

Estate Planning

The Equiti Investment Trust can dovetail into a client’s personal estate planning to achieve excellent asset protection and tax planning benefits for beneficiaries of an estate. That is, a beneficiary’s fixed entitlement to income from the Equiti Investment Trust can be passed to estate beneficiaries to provide an income stream in an effective manner, for example, by properly utilising testamentary trusts as an estate tax planning strategy.

The capital value of the assets within the Equiti Investment Trust can continue to be held for the benefit of the beneficiary class of persons identified within it.

This not only gives comfort to a beneficiary that their family members will be given the security of receiving a particular income stream but it is a means of accessing the benefits of trust assets which would not ordinarily form part of an estate after their death.

The nature of the Equiti Investment Trust can be distinctly useful for minimising the risk of claims upon a deceased estate, only the income rights can be ‘exposed’ to such a claim with the underlying investments continuing to be held within the trust structure for the persons first identified as the beneficiaries, often members of a particular family.

Unique Motivation

Where the use of the Equiti Investment Trust involves a business or other hands-on active investments the controller has the ability to provide a unique motivation tool; access can be given to a selected person to a share of a fixed and certain income stream (and therefore success of the underlying income producing assets), but the assets remain separate and distinct from them.

Income Stream

The Equiti Investment Trust has the facility to provide certain beneficiaries with an income, income tax assessable or otherwise. This feature can be important in providing a beneficiary with certainty of income from their investment in a trust. That is, the beneficiary entitled to this income stream is not subject to the exercise of the trustee’s discretion with respect to this income.

Like any other investment a person undertakes in order to obtain an income the beneficiary entitled to the fixed stream of income from the Hybrid Trust should be entitled to claim deductions for any losses or outgoings incurred in obtaining the assessable income, such as interest incurred by the beneficiary on any loan taken in order to make the investment.

Because the person making the investment enjoys a right to the whole of the income they will, whilst ever they hold the investment enjoy that income right in priority to all other beneficiaries. As the underlying income associated with the trust investments grows, so too does their income entitlement.

Tax Efficiency

Current Australian tax laws offer significant tax benefits for investing through a properly structured Hybrid Trust. In summary these benefits are:

    • the beneficiary entitled to a fixed distribution of assessable income should be able to claim tax deductions for losses incurred in gaining or producing that assessable income. Of course this is dependent on the purpose of the
    • investor-beneficiary at the time of incurring the relevant losses or outgoings;
    • flexibility for income distribution among the defined class of beneficiaries (sometimes called “income splitting”) subject to any fixed beneficiary entitlements;
    • potential for distributing different classes of income to different beneficiaries (sometimes called “income streaming”) to ensure that the different tax treatment applied to different class of income is best utilised by the beneficiaries again subject to any fixed beneficiary entitlements;
    • availability of the CGT 50% discount capital gain concession where capital gains are distributed to natural person beneficiaries;
    • potential for the CGT small business concessions to apply;
    • tax exempt income and concessionally taxed capital gain to be distributed in a manner which maintains the tax-free status of that income.
    • capacity for loans to be made to beneficiaries tax-effectively and in a flexible manner.

Equiti Investment Trust is one of the more intelligent ways to acquire growth assets.
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