Business owners often assume the trust structure protecting their trading business will do the same job for their estate. It usually won’t, and treating the two as one decision is one of the more common structuring mistakes we see. Different trust structures are taxed differently, and the structure chosen for inherited wealth is a separate decision from the structure chosen for a trading business.
Two different jobs, two very different structures
A trust set up to hold a trading business is usually built around flexibility during life. It focuses on distributing income each year, managing creditor risk while operating, and adapting as the business grows or changes hands. It is a live, ongoing structure with decisions made annually.
A structure built for inherited wealth answers a completely different question. It addresses what happens to assets after death, who controls them, and how beneficiaries stay protected once you are no longer making the decisions. A testamentary trust, for instance, only exists from the point of death and is taxed on a different basis from a trust operating during someone’s lifetime. Applying the logic of one to the other is where families run into trouble.
Why the tax office looks at these two things so differently
The clearest illustration is how income is taxed. When conducting a trust structure comparison, a family trust distributing to a minor beneficiary during the trust-maker’s lifetime typically faces penalty tax rates to prevent income splitting. A testamentary trust distributing to a minor beneficiary after death is usually taxed at ordinary adult rates. Same idea on paper, directing income to a family member. Completely different outcome, because the structures are answering different problems at different points in time.
This is the detail that trips people up when they assume their business trust deed will simply carry over to serve as their estate plan. It won’t, and relying on it to do so can leave beneficiaries paying more tax than necessary, or leave assets exposed in ways the will-maker never intended.
Stop assuming one master plan fixes everything
Evaluating succession planning structures for a business – meaning who takes over and how ownership transitions – is its own body of work. Estate planning, meaning who inherits and how inherited wealth tax considerations impact beneficiaries, is a related but separate exercise. Both matter for a business owner, and both deserve deliberate structuring rather than an assumption that one document covers both.
The practical takeaway is straightforward. If a business trust deed was drafted with the trading business in mind, it is worth reviewing whether the estate plan needs its own structure, built for what happens to wealth after death rather than how the business is run while its owner is alive.
How Abbotts can help
Abbotts has worked alongside Western Australian business owners for more than 35 years, across both the business structure and the estate side of the picture. If your business trust was set up to run the business and you haven’t separately reviewed what happens to your estate, that’s worth a conversation.
Read more on how a testamentary trust works and who it suits in our companion piece, or speak with an Abbotts adviser about aligning your business and estate structures.