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21 November 2023

It Depends – What is a child maintenance trust and when can I use one?

Authored by: Nathan Rutherford
In this edition of ‘It depends’, lawyer Nathan Rutherford talks about child maintenance trusts and when to use them.

Video transcript

Hi. Welcome to It depends. Today we’re going to talk about child maintenance trusts and when to use them.

What is a child maintenance trust?

The name’s pretty self-explanatory. A child maintenance trust is essentially a trust that is set up to maintain the child. There are some special requirements to setting up a child maintenance trust though and there are some special benefits that come with them.

What are the benefits of child maintenance trusts?

We spend a lot of time talking about the benefits of discretionary trusts, particularly in relation to tax planning. One of the limits for discretionary trusts though is if we’re distributing income to minors, we can only distribute about $500 before we start paying tax at the highest marginal rate. For child maintenance trusts though, children are essentially treated as adults, which means if they’re not earning income anywhere else, we can distribute up to the tax-free threshold to them without the child paying tax on that distribution.

Sounds great, can I set one up?

It depends. Child maintenance trusts are a fantastic estate planning opportunity, but they can only be set up in fairly limited circumstances. Firstly, the child’s parents need to have separated and there needs to be an order in place about the separation. Secondly, the parent who is transferring the assets into the trust must be under a legal obligation to either maintain the child or transfer property for the benefit of the child. Thirdly, there are some restrictions in place about who can receive capital from the trust and who has to receive the capital of the trusts when the trust vests. There are some significant tax consequences to getting this wrong. So, as part of the process to set one up, we usually recommend applying to the ATO for a private ruling so that you have some certainty about the tax consequences. If this sounds like something that you or any of your clients are interested in, please feel free to contact me or one of the team and we’re happy to talk to you about it some more. Thanks for watching.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.

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