Benefits of Child Maintenance Trusts

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Child Maintenance Trusts are established for the benefit of children after the breakdown of a family. There can be several advantages and disadvantages of child maintenance trusts depending on each individual circumstance.

Child Maintenance Trust will typically be most useful to people with a high net worth and may not be practical for all families.

In order to establish a CMT there must be a family breakdown, the assets of the trust must be beneficially owned by the child(ren), the trust must generate investment income for the maintenance, education or advancement of the child and there must be an arms length return on the investment and the transfer must be pursuant to an order, determination or assessment of a court, person or body. ¹

Tax Benefits of a Child Maintenance Trust

There can be substantial tax benefits that result from child maintenance trusts in certain circumstances, if correctly formulated.

Tax assessment Act 1936 s 102AG (2) (c) (viii):

‘An amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary as a result of a family break down.’

Any unearned income received by the minor beneficiaries are taxed at a rate of 66%, ² although income from a CMT is ‘excepted income’ and will only be subject to marginal tax rates.

In order to ensure that income generated by the CMT is ‘excepted’ all elements necessary to establish the trust must be satisfied. Usually, the elimination of tax obligations for the children will result from the combination of the tax-free threshold and the low-income taxpayer offset. ³

Child Maintenance Trusts also provide the certainty that if a relationship dissolves, the maintenance provider may be ordered to pay maintenance for the child, helping to secure their financial future. Furthermore, the assets that are held within the trust will be protected for the benefit of the minor beneficiaries.

Disadvantages of a Child Maintenance Trust

While these elements may provide advantages to individuals in particular cases, there are also disadvantages that must be acknowledged before deciding whether a CMT might be appropriate for you and your family’s situation.

In the first instance, the property is effectively ‘lost’ from the control and ownership of the initiating parent, becoming the property of the trust.

Secondly, maintaining the trust will cost money to maintain and when the property is transferred into the CMT, there is no capital gains tax rollover relief upon the transfer of assets. Dependent on several components, the transfer of assets may also incur a stamp duty.

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Katherine Patricia Finch

Online Legal Information Author at Family Law Express

University of Sydney

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