What is a family trust?


An Australian family trust is a type of trust that protects a family's income and capital gains or business. Discretionary trusts are advantageous for anyone who wants to benefit from tax deductions and better manage their money. 

A family trust is essentially a legal document between a trustee and beneficiary or beneficiaries. The trustee holds property and assets for the beneficiaries and decides how much capital gains they receive. There are pros and cons to a family trust. 

Let's get to the following commonly asked questions:

  • How to set up a family trust?
  • How does a family trust work?
  • Why establish a family trust?
  • How does a family trust protect your assets?
  • Who can be a beneficiary of a family trust?
  • How to transfer assets into a family trust in Australia?
  • How are family trusts taxed?
  • How to dissolve a family trust? 

Read our guide to understand all you need to know about family trusts and why you should set one up.

Q1: How to set up a family trust?

Family trust funds are becoming increasingly popular in Australia. Whether you're setting up a family trust to protect family members or your Australian business, you should seek financial advice.

The first step is to choose a trustee. A trustee can be anyone apart from yourself, and it can be one person, a group of people or a company (known as a corporate trustee). They do not have to be a professional; they can be a family member or trusted friend. If you use a corporate trustee, take note of the business structure. 

The trustee must be someone who understands the role and implications. They must be able to act on behalf of the beneficiaries best interests, not their own. The appointer chooses the trustee, and the appointer is not involved in the daily dealings of the trust. It is also a good idea to agree on a successor during the trust establishment process.

Next, you need to draft the trust deeds. You will likely need to employ the assistance and professional advice of a lawyer or business accountants. You will need a lawyer to sign off on the trust documents. 

It would help if you settled the trust, which involves an independent person transferring a sum into the trust as the first deposit in the trust fund. 

However, the settlor should be unrelated to the beneficiaries or the future of the trust, and they must have no power to dissolve or amend the trust.

You might need to pay stamp duty, depending on your state. Then, registering and reporting to the Australian Business Register is required. 

Finally, you need to set up a trust bank account. As this is established and maintained by the trustee, it is typically in their name. Compare accounts and bankers.

Note: To establish a family trust, the trustees must make irrevocable trusts by voting on a family trust election form.

Q2: How does a family trust work? 

A family trust works like a bank account set up by parents for their children. The money belongs to the child, but the parent is in charge. Similarly, the trustee controls the money and assets belonging to the beneficiaries of the trust. 

In a lifetime, someone might deposit capital or assets into a family trust or unit trust. The trustee distributes income between the beneficiaries as and when they deem fit. It is a type of financial protection over family assets. 

A trust is not a separate legal entity but an agreement between parties. A trust might distribute an annual income for beneficiaries or save for specific occasions, like schooling or home buying.

Beneficiaries might be anyone in the family or someone involved in the family business. Typically, primary beneficiaries are parents, and secondary beneficiaries can be grandparents, children, or companies.

Q3: Why establish a family trust?

There are many advantages and disadvantages to establishing a family trust. Firstly, the assets held in a family trust are protected. 

If your business fails or you find yourself in credit card debt, the assets in your family trust are untouchable by creditors. Similarly, a family trust cannot use family trust assets for debt consolidation

The asset protection offered by family trusts is a huge draw. If you have invested in property, you can use your trust to protect it from creditors.

Secondly, family trusts enable you to keep your assets within the family. Whether this includes investment property or business trademarks, a family trust helps you protect your family assets. 

It also allows you to stagger inheritance. For instance, you can protect vulnerable family members from spending their inheritance all in one go. It can also act like life insurance. 

You can use it to ensure your family members have money for schooling (avoiding student loans), retirement planning, or estate plans. Finally, there are tax advantages to putting money and assets into a family trust, and we'll cover the tax benefits in more detail later.

Important: There are also disadvantages to setting up a family trust. These include unsuitability to run a business, loss of ownership of assets, and ongoing management and fees.

Q4: How does a family trust protect your assets?

Family trusts are helpful to protect assets from creditors. As the trust's assets are not technically in your name, they can not be associated with your personal finance. 

Creditors cannot touch your assets, trust income, or real estate under a trust. A trustee is a person in charge of distributing the assets, which comes with many perks for taxation issues, succession, and asset protection.

Note: If you want to protect your property investment from creditors, seek a business advisory service or financial planning assistant to help set up a family trust.

Q5: Who can be a beneficiary of a family trust?

The beneficiary or beneficiaries can be anyone in the family or involved in the family business. You cannot change the default beneficiary. 

Be careful when adding or removing a trust's beneficiaries as there might be capital gains tax or stamp duty forfeits. 

Consult the Australian taxation office if you're concerned. A trust's capital gains are distributed to beneficiaries at the discretion of the trustee. 

Q6: How to transfer assets into a family trust in Australia?

To transfer the existing family's assets into a family trust, you must move the property's title to the trust. 

Transferring individually owned assets essentially means placing the interest of the property in the name of the trustee. A trustee that holds assets on behalf of a family trust is in charge of the legal aspects.

Q7: How are family trusts taxed?

You should seek advice from a financial advisor or taxation office before setting up a family trust for tax planning. There might also be tax-free thresholds benefits that your financial planner should investigate.

While family trusts often minimise tax, they are still liable to pay taxes. For example, family trusts are usually subject to estate tax and other trusts' tax.

Upon receiving their distribution from the trustee, beneficiaries might pay capital gains tax alongside their income tax. 

Note: Any money not distributed to the beneficiaries is liable to pay top marginal tax rates, and top marginal tax rates can impact the trust's net income. 

Q8: How to dissolve a family trust?

A trust will automatically terminate once all assets are distributed among the beneficiaries. 

If all the beneficiaries are over 18 and wish to dissolve the family trust, they can agree to distribute the assets. They can effectively ignore the views of the settler and trustees.

In summary

Setting up a family trust in Australia can be of great financial benefit. Trusts are advantageous whether you want to hold a property for your children or protect your family business from creditors, and it is also prosperous for tax purposes.

It is a good idea to seek the assistance of a financial advisor to understand the tax rates and how to set up your trust. 

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

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