The ‘F’ word

‘Free’ is my second favourite four letter “F” word after ‘food’. Who doesn’t love free stuff, especially ‘free food’?! But sometimes free comes at a price! The following is a true story but with some change of details to conceal the identity of the people involved.

The story…..

Brian the engineering student

A few year’s into my career as an accountant I was talking to Brian, a friend who just started university. Brian was studying engineering so was quite bright and intelligent. We were talking about our work and how it was going to help us achieve our goals in later life. We were both going to save our money in our careers and build up a portfolio of investment’s to enjoy with our family.

‘I can’t wait to finish university and start making some real money’ Brian said.

‘It is great to start working full time earning a professional salary. I have more money then I had as a student and I have started saving and investing. I have even set up a trust for investing in.’ I said.

With a pause in conversation Brian’s face changed to one of curiousity. His mind digested the words I had just spoken.

Brian was now clear with his question and asked ‘What is a trust and why are you using it?’

In good trust

I began to explain my new learnt understanding of tax and legal structures I had gained from working as a tax accountant.

‘Well, a trust is a way to hold assets for the benefit of the trust beneficiaries. My trust beneficiaries are my family members. So I buy investment’s in the trust. When I make a tax gain or profit in the trust, that is distributed to the beneficiaries, which are my family. We use a discretionary trust so we can allocate the distribution based on what is the most tax advantageous way. So it is also a way to reduce the tax we pay on the profit.’

I continued to explain more as Brian asked more questions. It included how I used a lawyer to create the trust, the benefits a trust had over a company, how the trust could be used to also protect assets.

‘Wow, that’s really great to know. Thanks!’ I could see the excitement on Brian’s face as he thought about how a trust could be used for him and his family.

10 years later….

Henry the business student

Some 10 years later I was at a university student and alumni networking event. I was talking to Henry, a mature age student who grew up in my home town. As it turned out Henry was Brian’s cousin. I told Henry I was an accountant.

Henry replied ‘I wish I knew you 5 years ago.’ He said shaking his head.

‘Why is that?’ I asked.

Henry explained. ‘I won $20,000 in a lottery. It was the first large sum of money I ever had. I didn’t want to blow it and my family also encouraged me to do something good with it. My family told me I needed to use it for my future, so I had a lawyer create a trust. The lawyer charged $8,000 in fees to create the trust. Then there was accounting costs. Within 3 years there was less than $10,000 in the trust so we decided to pull it out as it was costing too much.’

Bad advice

I was disheartened by Henry’s story. I put two and two together and could only assume Brian had convinced Henry that he needed to set up a trust based upon our conversation. I was the one who told Brian about trusts. I was upset with both myself and Brian. Brian was a smart guy. But he didn’t have the knowledge and years of experience to know when and how to use a legal structure such as a trust. He wasn’t the right person to be giving tax and financial advice. I could only sit there and think ‘if only Henry had spoken to someone who would have given him the right tax and financial advice. Then he would be better off instead of worse off as an outcome. What was $20,000 was now less than $10,000.’

The moral of the story

The moral of the story is that while getting something for free is great, it could possibly cost you more in the long run.

So learn from Henry’s story. Speak to people with the right knowledge and experience to get the right advice for you. But be prepared to pay for it. While it will cost you money now, it will save you a lot more in the future.

The silver lining

The silver lining to this story is that in losing this money, Henry realised how much he didn’t know about money. So he decided to go to university and do a degree in business. Henry was using what was left of his $20,000 to help pay his way through university over the coming years. Henry is a smart guy, but Brian’s free advice as someone who didn’t have the right knowledge and experience had cost Henry a lot of money.