Family trust structure in Australia has become a popular taxation and estate planning tool among many family groups.
Because it provides family members with a vehicle to distribute income whilst also passing control of their assets tax effectively and with certainty to the next generation – all while offering excellent tax benefits and asset protection strategies.
So, what do we need to consider setting up an family trust within Australia?
What Is A Family Trust?
A family trust is a discretionary arrangement created to hold family assets and/or manage a family business on behalf of the trust beneficiaries.
A family trust is a type of discretionary trust because it’s set up to allow the trustee or trustees to have complete discretion on how the family trust’s net income and capital (or revenue losses) are distributed to the family group beneficiaries.
Parties to an Australian Family Trust Explained
To understand how a family trust works, you’ll need to have a basic idea of who is all involved in the set-up and management of the trust:
- the trustee is the person or corporate entity who will administer your family trust according to the trust deed (the trust deed is the agreement that governs the operation of the trust),
- the settlor is the person responsible for signing the trust teed and authorising the trustee to manage the trust,
- the beneficiaries are the people appointed during the family trust election to benefit from the assets and wealth held in the family trust, and
- the appointor is an individual who holds the authority to remove and nominate trustees in cases where the original trustee has passed away or can no longer administer the trust according to the trust deed.
Characteristics of Discretionary Trusts
Because family trusts are considered discretionary in nature, they possess the following characteristics:
- the trustee (or trustees) can be an individual or a company (corporate trustee),
- beneficiaries don’t have an automatic right to the property contained in the family trust,
- trustees are given complete discretion when it comes to distributing income and capital to the beneficiaries, and
- minors can be named beneficiaries (although distributions to minors can be taxed up to 66%).
How Do You Set Up A Family Trust?
A few steps are involved in setting up a family trust in Australia, which we will explain in basic terms below.
However, each family group’s circumstances differ, so you’ll need to consult a financial advisor or tax agent to walk you through the various steps:
- Step 1: determine if a discretionary trust structure best suits your circumstances
- Step 2: select your trustee or trustees
- Step 3: identify the trust beneficiaries
- Step 4: draw up the trust deed with the help of a legal expert
- Step 5: appoint the trust fund settlor and complete the settlement
- Step 6: hold a trustee meeting where the trustee will formally accept their appointment
- Step 7: lodge the trust deed and pay stamp duty
- Step 8: apply for a trust ABN and TFN (tax file number)
- Step 9: open a trust bank account
Benefits of an Australian Family Trust Explained
There are several beneficial reasons for setting up a family trust, including:
- Asset protection: using a trust as an ownership structure for your family’s assets and family business means that you won’t be the legal owner of the asset or business but rather the beneficial owner.
- Tax effective structure: the most common way of utilising a family trust for tax purposes is to distribute more assessable income to beneficiaries with a lower marginal tax rate because they’ll pay tax at a reduced amount compared to beneficiaries with the highest marginal tax rate.
Succession planning: the trust structure can allow child beneficiaries to access trust capital once they’re older to fund their studies, for example.
Estate planning: a family trust can simplify the estate distribution process because the trust deed establishes exactly how the trust will operate and each party’s role in the trust.
What Are Some Family Trust Disadvantages?
While family trusts have significant tax protection advantages, there are also a few potential disadvantages that you’ll need to weigh up:
- No longer the asset owner: the trustee will become the legal owner of any assets transferred into or purchased using the family trust.
- Higher tax rate for undistributed income: if your trustee doesn’t structure the family trust effectively and you end up with undistributed income, the trust will be liable to pay tax at a much higher marginal rate.
- Trust losses are trapped: if your trust assets run at a loss, you can’t subtract these losses from your taxable income.
- You might not be eligible for the tax-free land threshold if your family trust purchases property in certain states or territories.