Author: Peter Szabo – Family Law Practice Manual.
Child Maintenance Trusts are flexible and provide long-term options for managing family wealth after separation.
They not only enable school fees to be paid at marginal tax rates but also create opportunities for surplus income to support wider beneficiaries.
This has advantages such as:
1. They can be established any time after separation.
2. Capital can be added at any time.
3. Vesting can be delayed up to 80 years, not just when a child turns 18.
4. Capital can be borrowed at commercial rates.
5. Once child support obligations are met, excess income can be distributed elsewhere in the family group.
Benefitting the Grandchildren
Given the high divorce rate, many parents would prefer to leave their assets for the benefit of their grandchildren. The grandparents can establish a testamentary trust with the grandchildren as beneficiaries, but to activate that Trust, the grandparents must die. However, If the parents separate, their children may be eligible for a Child Maintenance Trust (CMT) under Section 102AG of the Income Tax Assessment Act 1936 (ITAA). You don’t have to kill off the grandparents. With careful estate planning and restructuring as part of a property settlement, family wealth can be dealt with more effectively.
A common fallacy is that the capital has to vest when the children turn 18. This is not so. It can be when the trust vests in 80 years. Further, once the child support obligation is met, any surplus can be distributed to other eligible beneficiaries. Capital can be loaned out, with a commercial interest rate.
Cashed-up Baby Boomers may be able to provide the necessary capital for the establishment of such a trust, which in the past was difficult to do, as the capital required simply did not exist. It is a very different landscape today.
Accountants and financial advisers need to be aware of the flexibility available for the injection of funds into the CMT. Even if the grandparents are not cashed up when their children separate, capital can be accumulated over time. That will provide the window of opportunity for a CMT to be established in readiness for secondary school.
The average life expectancy for Baby Boomers is 2029. They are downsizing and passing down assets to their children. There is a tidal wave of property coming down the line that perfectly suits the establishment of a CMT.
Family Law Requirements
In section 102AG of the ITAA:
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There must have been a breakdown of a domestic relationship;
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One or both parents have child support obligations;
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Those obligations can be met personally or via a child support trust; and
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If there are 2 or more children to benefit, the trust is divided into separate sub-trusts for each child.
Structure and Accounting Requirements
To generate concessionally taxed “excepted trust income”, the Trust must:
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Be funded by one or more transfers of assets;
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Those transfers must not include discretionary distributions; from another trust or a company; and
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The earnings of the trust must not exceed what would have been earned on arm’s length terms.
Trust distributions are taxed at marginal rates. Excess Trust income not required to pay child support can be distributed to other entities in the family group including the liable parent, The trustee can only make capital distributions to or for the benefit of the child, but those distributions can be delayed for as much as 80 years from the date the Trust starts. There is a common misconception that the children must be paid out at 18.
The trustee can lend trust funds not required to generate child support income to other entities in the family group, including the liable parent, provided that any loans are repaid within the 80-year vesting period.
A problem with child maintenance trusts has been for trustees and accountants to assume that the trust can be administered as if it were a family trust. As is highlighted above, to qualify for the income tax concessions, the particular requirements for a Child Maintenance Trust must be satisfied. Trustees and accountants must be careful to first pay attention to the requirements specified above. Once that is done, normal trust rules apply.
Summary
In summary, Child Maintenance Trusts are flexible.
They can be established any time after separation;
- Grandparents don’t have to die to activate the trust;
- Capital can be added at any time;
- Capital does not have to vest when a child is 18;
- Capital can be borrowed at commercial rates; and
- Once child support obligations are met, excess income can be distributed to other beneficiaries.
