Written by:
Joel Simmonds
Head of Advice
If you’re thinking about setting up a family trust, you’re probably looking for a way to protect your family’s assets and ensure they’re passed down smoothly to the next generation. It’s a big decision, and getting it right can make all the difference to your financial future.
A family trust isn’t just for the super-wealthy. It’s a powerful legal structure that can help families manage their assets, minimise tax, and plan for the future. But like any big financial move, it’s important to fully understand how it works and when it makes sense to use one.
So, what exactly is a family trust, and when might it be the right tool for your family?
A family trust is a type of discretionary trust set up to hold assets for the benefit of family members.
Essentially, it’s a way of structuring your finances so that the income and assets can be managed for the long-term benefit of your family. The trustee manages the trust, deciding how and when income and capital are distributed to the beneficiaries (usually family members).
Here’s the key part: the beneficiaries don’t own the assets directly—the trust does. This structure provides flexibility in how the assets are used and gives the trustee the ability to distribute income in a way that best supports the family’s needs.
The decision to set up a family trust often comes down to specific financial and family goals. A family trust might be right for you if:
In Australia, a family trust is typically set up as a discretionary trust, meaning the trustee has full control over how and when income or assets are distributed to the beneficiaries.
Here’s a simple breakdown of how it works:
A family trust is typically set up as a discretionary family trust.
This means the trustee has full discretion to decide how income and assets are distributed among the beneficiaries, who are usually family members. This flexibility allows the trustee to allocate resources based on the changing financial circumstances of the family, offering a way to manage assets in a tax-effective manner.
One of the advantages of a discretionary family trust is that income can be distributed to beneficiaries in lower tax brackets, reducing the overall tax burden for the family. However, it also requires careful management by the trustee to ensure that distributions are made in the best interests of all beneficiaries.
While family trusts offer flexibility and control for managing family assets, they might not always be the best option depending on your specific goals and needs.
In some cases, other types of trusts, like discretionary trusts for broader groups or unit trusts, could be more suitable. Here’s when you might want to consider a different type of trust:
Discretionary Trust: If you’re looking for a more flexible way to distribute income and capital beyond just family members, a discretionary trust may be the better choice. These trusts give the trustee full discretion over how income and assets are allocated, often benefitting beneficiaries across different tax brackets or family structures.
Unit Trust: If you’re investing in property or managing assets for multiple parties with fixed entitlements, a unit trust might suit your needs better. In a unit trust, beneficiaries hold units that represent their share of the trust’s income and capital, making it more predictable and structured compared to a family trust.
Choosing the right type of trust depends on what you need the trust to accomplish, whether it’s flexibility in distributions, protecting assets, or ensuring fixed entitlements.
Be sure to evaluate your options carefully and consult with a financial advisor or legal professional before making any decisions.
There are several key benefits to setting up a family trust:
While family trusts offer flexibility and control for managing family assets, they might not always be the best option depending on your specific goals and needs.
In some cases, other types of trusts, like discretionary trusts and unit trusts, could be more suitable. Here’s when you might want to consider a different type of trust:
Choosing the right type of trust depends on what you need the trust to accomplish, whether it’s flexibility in distributions, protecting assets, or ensuring fixed entitlements.
Be sure to evaluate your options carefully and consult with a financial advisor or legal professional before making any decisions.
A family trust can offer fantastic benefits, but it’s not for everyone.
The decision to set one up depends on your personal financial situation and goals. Here are a few situations where a family trust might not be ideal:
If you think a family trust is the right choice for your family, here are the basic steps to get started:
Appoint a Trustee: You’ll need to appoint a trustee to manage the trust. This could be a family member, a friend, or a corporate trustee.
Create a Trust Deed: The trust deed outlines the rules of the trust, including who the beneficiaries are, how the assets will be managed, and how income and capital will be distributed.
Make a Family Trust Election: If you want your trust to be treated as a family trust for tax purposes, you’ll need to make a family trust election with the ATO.
Transfer Assets into the Trust: You can transfer assets like property, shares, or cash into the trust. Keep in mind that transferring property into a trust may have tax implications, such as capital gains tax and stamp duty.
Open a Bank Account: The trustee will need to open a family trust bank account to manage the trust’s income and assets.
When deciding whether to use a family trust vs a company structure, it’s important to understand the differences.
A family trust offers flexibility in distributing income to beneficiaries, while a company provides more rigid structures, often better suited to businesses.
However, some family trusts use a corporate trustee, meaning a company manages the trust on behalf of the beneficiaries. In some cases, a family trust might also be trading as a company, adding another layer of complexity.
Setting up a bank account for a family trust is a crucial step once the trust is established.
Choosing the best bank for your family trust depends on factors like fees, account flexibility, and the types of services you’ll need to manage the trust’s finances.
Additionally, if you’re planning to borrow funds or make investments through the trust, you’ll need to consider which banks lend to family trusts and what their lending criteria are.
A family trust can sometimes complicate divorce proceedings, especially if the trust excludes certain family members, like a spouse.
In Australia, even if a family trust excludes a wife, the Family Court may still consider the trust’s assets when dividing property. If you’re concerned about how a familial trust might be affected by a divorce, it’s essential to seek legal advice to protect both the trust and the beneficiaries.
Setting up a family trust can be a powerful tool for protecting your family’s wealth, reducing taxes, and planning for future generations.
But it’s essential to ensure it aligns with your unique financial goals and circumstances. Our team is here to help you navigate the complexities of trusts, from determining the right structure to ensuring you maximise the benefits.
Whether you’re considering a family trust, discretionary trust, or unit trust, we can guide you through the setup process and tailor the trust to your specific needs.
Let’s get started today. Reach out for a no-obligation consultation, and we’ll work with you to make the best decision for your financial future.
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Here’s some of the most commonly asked questions about family trusts.
If your question isn’t answered below, please feel free to get in touch. We’re always happy to help.
A family trust election is a process where the trust nominates a specific group of beneficiaries (usually family members) for tax purposes.
This election allows the trust to access certain tax benefits, including franking credits on dividends.
However, once a family trust election is made, distributions are limited to the nominated beneficiaries.
No, personal services income, like a salary, cannot be paid directly into a family trust. Your salary is taxed at your individual marginal tax rate.
However, income from investments or business activities held within the family trust can be distributed to beneficiaries.
A family trust is a type of discretionary trust set up to manage assets for the benefit of family members.
The trustee has control over income and capital distributions, making it a flexible tool for managing family wealth.
Some people refer to the ability to distribute income to family members in lower tax brackets as a tax loophole. However, this is a legitimate benefit of the family trust structure in Australia.
Keep in mind that the ATO closely monitors family trusts to ensure compliance with tax laws.
The trustee of a family trust has the discretion to decide how income is distributed to beneficiaries.
This means income can be allocated to family members in lower tax brackets, potentially reducing the overall tax burden.
However, income retained in the trust may be taxed at the highest marginal tax rate.
The family trust election form is a document that must be submitted to the ATO if you want the trust to be treated as a family trust for tax purposes.
This election helps the trust gain access to specific tax advantages but restricts distributions to family members.
Yes, you can transfer property into a family trust, but it comes with tax implications. You may be subject to capital gains tax and stamp duty on the transfer.
It’s advisable to consult with a financial advisor before making any decisions.
Not necessarily. A family trust only needs an ABN if it’s carrying on a business.
For trusts that purely hold investments or property, an ABN may not be required.
A family trust offers several benefits, including asset protection, tax advantages, and estate planning flexibility.
It allows for income distribution among family members in a tax-effective manner, helping to reduce the overall family tax liability.
Yes, an accountant can assist in setting up a family trust.
They can help draft the trust deed, file necessary tax elections, and ensure compliance with ATO regulations.
However, it’s also recommended to seek legal advice to ensure the trust structure is sound.
A family trust can offer some protection in divorce, as assets held within the trust do not belong to individual family members.
However, the Family Court may look closely at trusts during divorce proceedings, especially if one spouse controls the trust.
It’s important to get legal advice if you’re considering how a family trust might impact a divorce settlement.
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