Strategy 4 – A discretionary trust

This strategy takes one of the previous investment strategies and places it into another structure which you may not be familiar with—a trust.

Trusts are not uncommon and there are many types. There are two types of trusts, however, which are used more often than others. They are:
• discretionary trusts
• unit trusts.

However, for the context of this book, I will focus on one main type of trust and avoid going into too great a detail—discretionary trusts. There are many books that cover trusts and I suggest you get as much background information as possible before you take on this strategy.

So, who is involved in a trust and what are their roles?

There are a number of parties or people involved in a trust. They are:

Appointor The boss, the person with the most control. The appointor has the power to change the trustee and appoint a new one at any time
Trustee The person/s or company that controls the trust
Trust The structure that holds the investment assets
Beneficiaries Owners of the assets and entitled to the income of the trust

Financial Adviser Provides advice and manages the affairs
Solicitor Establishes the trust
Accountant To liaise with the adviser and prepare the regulatory requirements for the ATO

One point to always keep in the back of your mind with a trust; you (as the trustee) are the legal owner of the trust property although you are not the beneficial owner of the assets. The trustee has the responsibility to manage the trust assets and must act in the best interest of the beneficiaries.

Note: I may have already started to confuse you at this point. This area requires sound legal and accounting advice to ensure you have the right trust tailored for your situation. Don’t always assume the ‘off the shelf trust’ is right for you. You are far better to pay more for a tailored structured trust than a run-of-the-mill document.

A discretionary trust is called just that because the trustees (typically the parents in this context) can determine how much income may be paid to the beneficiaries of the trust. It is their discretion. The trustees can vary this amount from year to year.

A discretionary trust can achieve a number of objectives:
• It will take care of your family for the long term
• It has sound asset protection. That is your assets may be protected from creditors.
• A trust can be very flexible. It can assist in sharing the tax burden among your family and/or other members of the trust.
• It can trade in its own way but it is different from your personal tax structure and/or a company tax structure.

Jonathan Cattana: How much will a financial advisor cost?

How much will a financial advisor cost?
There are two ways financial planners charge:
• A fee for service – a yearly fee or a percentage of your assets invested whereby you are managed at all times by your adviser. If there are any investment commissions or trailing income paid they are rebated back to the client:
• Commissions and trail commissions – this is where the adviser is paid via a product supplier in order to pay for the client’s cost.

Would you pay an adviser a yearly fee? This is purely your decision and sometimes a planner will only work in one particular way anyway. What is required by law though is that they give you a written Statement of Advice (SoA). This term has replaced the more common term ‘financial plan’.

What does a good financial advisor do?
First, all advisers want their clients to succeed. A financial planner provides strategies to help you be on the right road map for your personal and financial goal whatever they are.

For example, what are your goals? If you look at your children as an example, there are a few life goals that your child will go through which your financial adviser can help you plan for:
• school education.
• university education.
• an investment portfolio which may be invested in their first property
• funding their wedding
• assisting them to purchase their first home.

[Insert Road Map – to come – Margaret to do]

A financial adviser ensures that along the way towards saving for your life goals, nothing is left to chance. You have an end result and you simply work backwards and plan every last detail.

This does not mean that you, the client, needs to know all the strategies and legal and tax implication—that’s the planner’s job. However, the client needs to be aware of the disciplines of managing their own cash flow. Cash flow management is the main driver and the separator between success and failure in any financial objective.

A financial planner cannot guarantee returns (if one does then run the other way quickly). The role of a financial planner is to demonstrate the relativity of market returns between the asset classes you are looking to invest in.

Jonathan Cattana explains asset classes

What are asset classes?
The following are investment basics. At the very minimum you should aim to understand the four asset classes and be able to explain them to someone else. The principles of asset classes are very important and will not only prepare you for your approach to saving for private school fees, but also for any other lifetime financial goals you may be aiming for.

There are only four asset classes and they are:
• cash
• fixed interest
• property
• shares.

Cash This is a simple as it gets. Cash assets include any salary or wages you may receive and deposits in the bank or products like cash management trusts. Cash is the most dangerous to be in if you stay invested here for too long when you have longer-term goals. The only reason you would have cash sitting in a bank account is because you are about to buy another asset with it in the next 12 to 18 months.
With cash you can invest:
- in many forms
- directly or through a managed fund
- within Australia and overseas.

Fixed interest Fixed interest investments are mainly referred to as debt securities. This type of asset can be found in the form of government debt and bonds. Other fixed interest investments may sound familiar to you such as term deposits, corporate bonds, bank bills, inflation indexed bonds and debentures. These bonds and other debt instruments can be purchased locally as well invested internationally. With fixed interest you can invest:
- within Australia and overseas
- directly—though this may prove difficult—or through a managed fund.

Property We are all familiar with holding physical property such as owning your own home. This is referred to as holding direct property. You may also own other property such as an investment property.

You can hold property indirectly through a fund manager in the form of a listed property trust (LPT). LPTs can be purchased on the ASX (Australian Stock Exchange), or again managed by a fund manager. Over the past few years, interest and returns in this asset class has exploded and, more recently, Australian fund managers are looking to invest offshore. With property you can invest:
- directly or through a managed fund
- within Australia and overseas.

Shares When you buy shares, you are buying a piece of a company and become a part-owner of that business or a ‘shareholder’ of that company. By being a shareholder of a listed company you are in fact participating in the performance and profits of that company. You can find companies listed on the ASX in any major newspaper.

You may be familiar with listed companies with household names such as Woolworths, the Commonwealth Bank or BHP. Australia represents only a fraction of the total share markets in the world. International shares are a popular asset class. Some examples of international companies are General Electric or IBM in the United States. In this book we are referring to listed shares on any given stock exchange around the globe. You can buy shares within Australia and on overseas share markets. You can invest in shares in two ways:
- directly, that is buying shares on the ASX through a broker
- through a managed fund.

The only consistency between these asset classes above is this: They all perform differently at different times so they all have varying levels of income, they all have their own risks, (yes even cash!) and their price may rise and fall in value.

When you are reading other financial papers or magazines you may see reference to schemes such as tree and almond plantations that are referred to as another asset class. This is not correct, the majority of these schemes are tax driven. There are only four asset classes and I’ve outlined them above. I have always been wary about investment schemes that promote anything that sleeps, eats, grows or walks!

Jonathan Cattana on School Fees

Schooling in Australia

Education is the most powerful weapon that you can use to change the world.
Nelson Mandela

To start with, it is important that we look at schooling in context of Australia today. To do this we will look at the education system in Australia; the critical factors you should be thinking about when deciding whether or not to place a child in private school, and historical and projected figures for private school fees.

Never before has a good education seemed so important. An increasingly global economy and competitive workforce means the foundations for success need to be set early. With this thought in mind, many parents look to the schooling system to deliver the best outcome for their child.

In Australia, there are two main types of schools:

Government – these schools are fully funded by both the federal government and state and territory governments. Under most state laws they must accept any student. Around 67% of students attend government schools.1

Non-government or private – these schools are governed independently. Many provide a religious or values based education and others promote a particular education philosophy. Around 33% of students attend non-government schools. The non-government schools sector includes:
• Catholic schools – about 60% of non-government schools 2
• Independent schools – about 40% of non-government schools.

Catholic schools are run by the Catholic Church and generally they are less expensive than other independent schools. Overall, Catholic schools make up about 20 per cent of the Australian schooling system. 3

Independent schools are a diverse group and include: Anglican, Lutheran, Presbyterian, non-denominational Christian schools, Islamic schools, Jewish schools, Montessori schools, Rudolf Steiner schools and schools that specialise in meeting the needs of students with disabilities.

Family belief systems will strongly influence the type of school that you send your child to. The fact you have picked up this book means you are seriously considering the option of a private school education for your child.

Stages of schooling
Although the terminology and age ranges vary from state to state, generally speaking there are four main stages of schooling:
Preschool Age 5
Kindergarten, preparatory or reception year Age 6
Primary school Years 1–6 Ages 7 to 13
Secondary school, high school or college Years 7–12 Ages 13 to 18

If you decide to send your child to a private school, it is important to think about at which stage this might happen, although most parents are not concerned with preschool. MORE

Jonathan Cattana : Avestra Private Wealth

& Pegasus Asset Management has appointed Avestra Funds Management under a Funds Management agreement to manage the Pegasus 1Sport Fund.

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The Pegasus 1Sport Income Fund is perfect to provide a controlled boost to your Savings, Investments and Self Managed Super Funds. Jonathan Cattana : Avestra Private Wealth