Trusts can be a powerful estate planning tool for individuals and families to protect and manage their assets, both during their lifetimes and after they pass away.
Family trusts, in particular, are popular legal structures amongst many Australian families due to their high degree of flexibility, capital gains tax benefits and asset protection capabilities.
However, setting up a family trust can be a complex and time-consuming process that requires careful planning and attention to detail.
So, in this blog, we will explore the steps involved to set up a family trust, from determining whether a trust is a suitable choice for your family to selecting a trustee and creating a trust document.
Understanding How Family Trusts Work in Australia
A family trust (or a discretionary trust) is a legal arrangement where a trustee holds assets for beneficiaries. In other words, the trustee is responsible for managing the family assets in the trust, and the beneficiaries receive income and benefits from the trust.
When you set up a family trust, the trustee can be an individual or a company (such as a family business). The beneficiaries are usually family members, such as spouses, children, or grandchildren.
What sets a family trust apart from other trust structures is that it is discretionary in nature, which means that the trustee has the discretion to distribute trust income and assets to the beneficiaries as they see fit.
This can be beneficial for tax planning purposes and when providing for family members.
However, before establishing a family trust, you must evaluate all the pros and cons to determine whether it is the right choice for your circumstances. While family trusts can offer significant tax benefits, flexibility, control, and asset protection, they can also be complex and expensive to set up and maintain.
So, make sure to seek professional advice and carefully consider the costs and benefits of establishing a family trust, as well as any potential risks or drawbacks.
How Do You Set Up a Family Trust?
Setting up a family trust requires careful planning and attention to detail to ensure that it meets your individual needs and goals. So, there are a couple of steps to successfully set up a family trust.
1. Appointing Trustees and Identifying Beneficiaries
One of the first steps of setting up a family trust is to appoint a trustee and identify the beneficiaries.
The trustee is responsible for managing the trust and making decisions about how to invest in assets and distribute profits, while the beneficiaries are the individuals or entities that benefit from the trust.
You must carefully consider who to appoint as trustee, as they will have significant control over the trust’s operations and decisions. The trustee can be an individual or a company (i.e. a corporate trustee) and should be trustworthy, reliable, and knowledgeable about managing the trust effectively.
Identifying beneficiaries is also important, as they are the individuals or entities benefitting from the trust.
Beneficiaries can be family members or other individuals, and the trust deed should identify who they are and how to distribute the income and assets to them. You should carefully consider who the beneficiaries are and their tax bracket, as this can have significant tax implications.
Let’s say you have a family trust with two beneficiaries – one is in a higher tax bracket, and the other is in a lower one. The trustee can use their discretion to distribute income tax effectively by allocating more income to the beneficiary who has to pay tax in a lower bracket.
For example, let’s say the trust earns $100,000 in income. If the trustee distributes the income evenly between the two beneficiaries, each would receive $50,000, and the higher-tax bracket beneficiary would be taxed at a higher rate.
However, you would spread the tax burden more evenly if the trustee allocates $70,000 of the income to the lower-tax bracket beneficiary and $30,000 to the higher-tax bracket beneficiary.
2. Draft the Trust Deed
The next step in setting up a family trust is to draft a trust deed.
A family trust deed is a legal document that sets out the terms and conditions of the trust, including the roles and responsibilities of the trustee and beneficiaries and how to distribute the income and capital.
You should work with a qualified legal professional to draft a trust deed tailored to your specific circumstances and meets all legal requirements. The document should be clear and comprehensive, outlining all aspects of the trust and ensuring it is legally valid and enforceable.
Once you finalise and execute the trust deed, it will become the governing document for the trust and should be kept in a safe place for future reference.
3. Settle Your Family Trust
Settling a trust involves a nominated settletor signing the deed and giving the trustee a nominal sum (usually $10) to create the trust.
4. The Trustee Must Sign the Trust Deed
The settlor should be an unrelated third party and not one of the beneficiaries or the trustee. The purpose of the nominal fee is to establish the trust so that the trustee can transfer assets into the trust and begin managing them, as outlined in the trust deed.
The next step in setting up a family trust is to execute the trust deed. This process involves the trustee signing the discretionary trust deed and acknowledging its terms. The trustee must also voluntarily agree to act as trustee and carry out their duties and responsibilities under the trust deed.
Generally, it’s a good idea to complete this step with a lawyer to ensure that you complete the execution process correctly and in accordance with all legal requirements to ensure that the trust is valid and operates as intended.
5. Pay Stamp Duty
Depending on your state or territory, you may need to pay stamp duty.
If you create a trust in Queensland, you won’t incur stamp duty liabilities, but in New South Wales or Victoria, you’ll need to pay stamp duty to the relevant revenue authority.
6. Get Your Tax Affairs in Order
Similar to when you establish a business, you need to apply for an Australian Business Number (ABN) and Tax File Number (TFN), which you can do online or with the help of an accountant.
7. Set Up a Bank Account for the Family Trust
The final step involves opening a bank account for the trust in the trustee’s name (as they are responsible for managing the trust and its assets).
Once the settlor deposits the settlement fee into the bank account, the family trust becomes operational.
Why You Should Consider Seeking the Help of a Professional
Deciding whether to open a family trust and setting up the trust can be a complex process with legal and tax implications. You should, therefore, seek the help of a professional accountant who can provide valuable advice on whether a family trust is a proper structure for your circumstances.
They can also help you understand the benefits and risks associated with setting up a trust, as well as all the tax implications.
If you decide to proceed with setting up the trust, your accountant can guide you throughout the entire process, ensuring that it is established correctly and complies with all legal and tax requirements.
At KNS Accountants and Business Advisors, we have a team of experienced accountants who can guide you through all the steps, from evaluating the need for a trust to opening a trust bank account.
And with our expertise in tax planning, we can ensure that your family trust is set up in the most tax-efficient way possible. We also offer ongoing support and advice to ensure that your trust remains compliant and continues to meet your needs.
Contact us today to find out more about our family trust services.
Setting up a family trust is a complex process that requires careful consideration of your individual circumstances and goals. While it can offer significant benefits, such as asset protection and tax efficiency, it is essential to seek professional advice before embarking on this journey.
Let the experts at KNS Accounts and Business Advisors guide you through the process.
Contact us today to schedule a consultation with one of our experienced accountants and start securing your family’s financial future.