Child maintenance trusts save tax but at what costs?
Child Maintenance Trusts
There are two reasons why child maintenance trusts are not that popular, even though they can save you a lot of tax.
Save Tax
Let’s say you pay $40k in child support for two children per year. If you earn more than $180k per year, this means that you need to earn $80k each year to pay $40k in tax and $40k in child support.
A child maintenance trust let’s you scrap those $40k in tax. So then you just pay the $40k in child support and no tax. And your two children don’t pay any tax either if this is their only income. So zero tax all the way through.
Sounds good, right? But …this tax saving comes at a huge cost. You lose two things:
1 – Loss of Capital
Let’s assume a 5% return. For the trust to earn $40k a year, you need to hand over $0.8m. These $0.8m are gone. Unlikely that you ever see that money again. They will go to your children at vesting. So you end up paying child support plus the $0.8m.
2 – Loss of Leverage
If you are the payer, you have one draw card to secure regular access to your children – apart from going to court: Regular payments.
By handing over all of the money in one go, you lose that leverage.
If you are denied access to your children, you could – in theory – retaliate by not paying out trust distributions, but then you don’t just have the other parent chasing you, You also have the ATO to deal with.
Trade Off
Despite all this, a child maintenance trust might work for you if you are certain that access to your children won’t be an issue.
You can trade a child maintenance trust against lower ongoing payments. So you negotiate lower child support payments and in return pay a certain amount into a child maintenance trust.
Summary
Child maintenance trusts are not that popular because you lose capital and leverage. But they might still work for you if you can reduce ongoing payments accordingly.
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Last Updated on 11 August 2021
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