Grant Abbott and Tony Anamourlis from Abbott and Mourly Lawyers working on a child maintenance trust for a parent - saving tax and protecting assets!
Introduction
Child support in Australia is a legal requirement whereby a non-custodial parent contributes financially to the upbringing of their children post-separation or divorce. This financial support is essential in ensuring that the children's standard of living is maintained, covering costs related to education, health, and daily living expenses. The system is designed to balance the financial contributions of both parents, based on their respective incomes and the time spent with the children.
Using a Child Maintenance Trust
A Child Maintenance Trust (CMT) is a strategic tool that can be used by parents, once the preserve of high-net-worth individuals, to manage their child support obligations through a trust structure. By transferring property or income-producing assets into a CMT, the trust generates income that can be distributed to the children to meet child support payments. This setup not only ensures a steady flow of support funds but can also provide significant tax advantages. As child support payments are made post tax the use of the tax advantages of a CMT can result, in some cases, a saving of $100,000 over a 10 year term.
Case Study: Strategic Financial Planning Using a Child Maintenance Trust for Child Support
John, a father of two children aged 10 and 6, is required to pay $3,000 monthly in child support and an additional $20,000 annually per child for private schooling expenses. The total financial commitment until the children reach 18 years old includes both regular child support and substantial educational fees, creating significant annual financial obligations.
Situation Analysis
John's child support obligations amount to $36,000 annually in basic support. In addition, the private schooling fees for both children total $40,000 annually, bringing his total yearly obligation to $76,000. Given the long-term nature and size of these payments, effective financial planning is essential to ensure John can meet these commitments sustainably and efficiently from after tax resources. If John is on a 30% marginal tax rate the additional gross income he needs to earn to support his children is $108,571. Whereas if he is on the top marginal tax rate the gross income to support his children will be $138.181.
Implementation of a Child Maintenance Trust (CMT)
To manage these substantial child support and educational expense obligations, John establishes a Child Maintenance Trust. The trust is funded with income-generating assets—such as shares, property, or business interests—that John owns. These assets are transferred into the trust, which then uses the generated income to pay the child support and school fees directly.
Benefits of the Child Maintenance Trust
Tax Efficiency: The income generated by the trust and used for child support and educational expenses may be taxed at the beneficiaries' (children's) tax rates, which can be significantly lower, reducing the overall tax burden and meaning less of John's income to fund the support. If John is on the top marginal tax rate this can be as much as $45,000 per annum!!
Asset Protection: Assets placed in the trust are protected from personal financial risks and liabilities that John may face, ensuring that the children's support and educational needs are safeguarded.
Stability of Payments: The trust provides a reliable and consistent mechanism to manage and disburse payments, ensuring that child support and educational expenses are always covered on time.
Financial Planning: By securing assets in a trust, John can better manage his financial commitments and ensure that his children’s needs are met without disrupting his financial stability.
Estate Planning: The trust facilitates structured estate planning, allowing John to plan for the eventual transfer of assets beyond immediate child support needs.
Steps to Establish the CMT
Consultation with Specialists: John consults with experts Tony Anamourlis and Grant Abbott from Abbott and Mourly Lawyers to discuss the viability and structuring of a Child Maintenance Trust.
Drafting the Trust Deed: The legal team draft a CMT trust deed, clearly defining the trust's purpose, beneficiaries, and the terms under which it operates, specifically tailored to meet the legal requirements for child support and educational expenses.
Transferring Assets: John transfers or licences selected assets into the trust, which are then managed by the trust to generate income.
Ongoing Management: The trust is managed by a company with John as director who ensures compliance with all legal and regulatory requirements, and that distributions are made regularly to cover the support and education costs.
Conclusion
Using a Child Maintenance Trust, John effectively manages his substantial child support and education fee obligations. This strategic approach not only ensures compliance with his financial responsibilities but also maximises tax efficiencies and enhances financial security for both John and his children.
Given the complexities involved in setting up and managing a Child Maintenance Trust, it is crucial to work with experts who are deeply familiar with both trust law and family law. Tony Anamourlis and Grant Abbott, from Abbott and Mourly Lawyers, offer specialised services in this area. With extensive experience and offices across Australia, they provide not just legal advice but strategic guidance to ensure that Child Maintenance Trusts are used effectively, complying with all legal standards while optimising financial and tax benefits. For more detailed information on their services, visit www.abbottmourly.com.au or contact our manager nush@abbottmourly.com.au
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