An Australian family trust is a legal entity used to manage family assets and family business assets. It can provide tax benefits and ensure assets pass on to future generations in the most tax-effective way.
The most attractive feature of a family trust is that it’s discretionary, which means the trustees have discretion as to how the income and capital of the trust are distributed among the beneficiaries, which will ultimately impact how they pay tax.
While there are many reasons to consider establishing a family trust, if your family group is considering setting one up, it’s essential to understand how they work and their benefits. So, this article will give you an overview of what a family trust is and how it can help your family.
How Does a Family Trust Work?
The term ‘family trust’ refers to a legal arrangement whereby a trustee holds property on behalf of beneficiaries. A trustee controls the trust, with a legal responsibility to act in the best interests of the beneficiaries.
The trustee can be an individual or a corporate body appointed by the family or the court. The trustee holds the legal title to the trust property, but the beneficiaries have the equitable title. In other words, they have the right to enjoy the benefits of the trust property, but do not have any ownership rights.
Family trusts are also known as discretionary trusts, as the trustee is given wide-ranging powers to manage the trust property and distribute it in a manner they deem appropriate and most tax-effective. But they must always act in accordance with the terms of the trust deed.
What is a Trust Deed?
A trust deed is a legal document that outlines the terms of a trust, including the duties and responsibilities of the trustee, beneficiaries, and settlor (the party who gives the trustee authority to manage the trust).
Setting Up a Family Trust
If you’re considering setting up a discretionary (family trust), there are a few steps you’ll need to take. First, you’ll need to weigh a family trust’s advantages and potential drawbacks in light of your financial situation and future objectives.
If you’ve decided to establish a family trust after consultation with an advisor, you’ll need to choose the trustees and settle on the terms of the trust during the family trust election. Next, you’ll need to create the trust deed with the help of a legal expert. Then you’ll appoint the settlor and complete the settlement process.
Finally, you’ll need to hold a meeting where the trustee accepts their role, lodge the trust deed with the Australian Tax Office (ATO), and pay stamp duty on the transfer of assets to the trust structure. Before opening a trust bank account, you’ll also need to apply for an Australian Business Number and a Tax File Number.
What are the Potential Advantages of Setting Up a Family Trust?
Family trusts can offer several advantages, including asset protection, the flexibility to distribute income in the most tax-effective way, and estate planning.
Asset Protection Benefits for Family Members
A trust can offer some degree of protection for your personal assets because it allows you to segregate your assets from your personal affairs. This means that if you encounter financial difficulty, your trust assets would not be at risk because the trust is essentially the legal owner.
The Discretion to Distribute Trust Income in the Most Tax-Effective Way
The trustee of a family trust has a great deal of discretion when distributing the trust’s assets. They can choose to distribute the assets among the beneficiaries in whatever way they see fit, and they aren’t required to distribute the assets equally.
This flexibility can be useful in achieving certain income tax advantages. For example, suppose one of the beneficiaries is in a lower tax bracket than the others. In that case, the trustee can distribute more of the income to that beneficiary for tax purposes.
This will minimise the overall income tax liability for the beneficiary.
Estate Planning Benefits of a Discretionary (Family) Trust
Distributing assets after a loved one passes away can be complicated and emotional for many families. However, setting up a family trust can help to simplify the estate distribution process by keeping all the assets in one place and distributing the income to the beneficiaries according to your wishes.
It’s worth seeking professional advice and consulting an estate planning attorney for more ways to secure your future wealth for your family members.
Do Family Trusts Have Any Drawbacks?
While family trusts can provide many advantages, such as asset protection and tax savings, there are also some potential drawbacks.
One drawback of setting up a family trust is that it can lead to losing ownership of assets. When creating a trust, you essentially transfer ownership of your assets to the trust and appoint a trustee to manage them on behalf of the beneficiaries.
Another thing to consider is that the transfer of assets to the trustee often triggers capital gains tax, stamp duty and GST.
Other disadvantages you may want to keep in mind include:
- Undistributed income is taxed at the highest marginal rate;
- Trust losses can’t be distributed, which means beneficiaries can’t subtract any asset losses from their taxable income; and
- Family trusts aren’t eligible for the tax-free land threshold in some states and territories.
Key Takeaways
A family trust can be a rewarding yet complex financial tool for managing your family’s assets. So, there are several important factors to consider before setting one up. For example, a well-drafted trust deed is critical to ensuring your intentions are carried out, and the trust achieves its objectives. It is also essential to ensure you have the right people to manage the trust.
And once the trust is established, it is also important to keep up with the administration of the trust. This can be a complex and time-consuming task, so you might want to consider engaging the services of an accountant or business advisor who can help you.
KNS Accountants is a full-service accounting firm that specialises in family trust needs. We provide comprehensive services to help families manage their finances and meet their long-term financial goals. Our team of experts is knowledgeable in all aspects of trust accounting, including estate planning, asset management, tax compliance, and more.
We understand the unique challenges families face when managing their trusts, and we are dedicated to providing the highest level of service possible.
If you would like to find out more, we would be happy to discuss our services with you and answer any questions you may have.
Get in touch today.
