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Is a Family Trust Right for Your Situation?

Published 16/09/2024 | Last Updated 16/09/2024

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?

Table of Contents

What is a Family Trust?

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.

When Should You Consider a Family Trust?

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:

  • You want to protect family assets: A family trust can safeguard assets like property or investments from creditors, legal claims, or family disputes. For example, if a family member encounters financial trouble, their creditors can’t access the assets held in the trust.
  • You’re interested in tax planning: A big benefit of a family trust is the ability to distribute income to family members in lower tax brackets, potentially reducing the overall tax bill for the family. Keep in mind, though, that retained income in the trust may be taxed at a higher rate.
  • You’re planning for future generations: A family trust can help ensure that wealth is passed down through the family, keeping assets within the family line for future generations to benefit from.

How Does a Family Trust Work in Australia?

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:

  • The Trustee: The trustee is responsible for managing the trust’s assets. This could be a family member or a corporate trustee, depending on what’s best for your situation. A corporate trustee often provides more flexibility and continuity.
  • The Beneficiaries: Beneficiaries are usually family members who benefit from the trust’s income or assets, but they don’t have direct ownership of these assets.
  • Income Distribution: One of the major benefits of a family trust is that the trustee can distribute income in a tax-effective way. For example, if your children are in lower tax brackets, the trustee can distribute a portion of the trust’s income to them, potentially reducing the family’s overall tax bill.
  • Flexibility in Asset Distribution: The trustee can also decide when and how assets are distributed, based on the family’s needs and circumstances. This is particularly helpful if family members have different financial needs at different stages of life.

What Is a Discretionary Family Trust?

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.

When Should You Use a Different Type of 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 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.

The Benefits of Setting Up a Family Trust

There are several key benefits to setting up a family trust:

  • Asset Protection: Assets in a family trust are generally protected from creditors or legal claims. This can be particularly useful if you or your family members face financial difficulties or legal disputes.
  • Tax Planning: By distributing income to family members in lower tax brackets, a family trust can help reduce the overall family tax burden. However, it’s important to note that income retained in the trust can be taxed at the top family trust tax rate.
  • Estate Planning: A family trust can help ensure that your assets are passed down to future generations in an organised way, without the complications that can arise from wills and probate.
  • Control and Flexibility: The trustee can decide how to manage and distribute the assets based on the family’s needs, making the trust an adaptable tool for long-term financial planning.

When Should You Use a Different Type of 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:

  • 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.

Is a Family Trust Right for Everyone?

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:

  • Cost and Complexity: Setting up and maintaining a family trust can be costly and complicated. There are legal and accounting fees involved, and it requires careful management to ensure it complies with the law.
  • Loss of Direct Control: Once assets are placed in the trust, they no longer belong to you — they belong to the trust, and the trustee is responsible for managing them.
  • Tax Rules: If income is retained within the trust, it may be taxed at a higher rate, which could offset some of the tax benefits.

Setting Up a Family Trust in Australia

If you think a family trust is the right choice for your family, here are the basic steps to get started:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. Open a Bank Account: The trustee will need to open a family trust bank account to manage the trust’s income and assets.

Family Trust vs Company

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.

Choosing the Best Bank for Your Family Trust

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.

Family Trusts and Divorce

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.

Need Professional Advice for Setting Up Your Family Trust?

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.

Click here to learn more about our Estate Planning services.

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FAQs About Family Trusts

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.

1. What is a family trust election?

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.

2. Can my salary be paid into a family trust?

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.

3. What is the family trust?

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.

4. What is a family trust tax loophole?

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.

5. How does family trust income distribution work?

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.

5. What is the family trust election form?

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.

6. Can you transfer property into a family trust in Australia?

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.

7. Does a family trust need an ABN?

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.

8. What are the benefits of a family trust?

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.

9. Can an accountant set up a family trust?

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.

10. How do family trusts work in the context of divorce?

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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