A family trust can provide huge benefits in estate planning and management and allow for assets to benefit ongoing generations. They can also be a great way to accumulate wealth and keep it within your family.
All of which is probably why family trusts are continuing to grow in popularity among Australian families. Currently, there are more than 1.5 million Aussie families receiving a trust distribution, according to the ATO.
There are a multitude of reasons as to why someone might set up a family trust, but it’s important to have an understanding of what it is, how it’s established and the potential benefits/risks
What is a family trust?
Every trust must include a settlor, trustee, beneficiaries and trust property – so let’s look at those in a little more detail.
Australian family trusts are established by a settlor who contributes the original trust property (normally $20 or $50). Then there is a trustee appointed, the trustee can be a company or individual/s, the trustee agrees to hold assets for the benefit of the family members (the beneficiaries). The trustee can usually also be a beneficiary.
The key element of a trust is there’s no fixed ownership (the trust owns the assets). The trustee’s job is to protect the benefit of the beneficiaries. The trustee also decides which assets the beneficiaries receive a benefit from and how much each beneficiary is entitled to each year.
Types of family trusts
There are two common types.
- A testamentary trust – this is written into your will and only comes into effect once you’ve passed away.
- An inter vivo or living trust, which functions throughout your lifetime.
Benefits of family trusts:
Tax minimisation:
Living trusts could allow you or your family members to minismise their tax position. This is because tax is applied to each beneficiary separately and therefore allows for potential allocation to members on lower tax rates (especially if you might otherwise be paying for their living expenses – say in the case of a student or older relative).
The possible benefit there would mean distributing allocations to a family member whose paying a different (usually lower) tax rate rather than bearing the full brunt of income tax as a top marginal taxpayer and then having to pay those same living expenses from your own after tax dollars.
Asset protection:
A trust can also be effective in protecting your wealth, especially in an increasingly litigious society. And a trust could potentially protect your property or other assets from the marital assets should in-law or marital issues strike.
Future/retirement planning:
Creating a family trust could provide you with greater flexibility in planning income distributions to your family (or yourself) when you stop earning a regular wage.
It could allow you to accumulate long-term wealth with potential tax benefits. In comparison to superannuation funds, you’re able to access the assets within your trust whenever you want – rather than waiting for preservation age.
Those who are seeking to protect their assets from sale by younger family members could also use a trust to ensure children can benefit from the property without selling.
Before you rush off to your accountant, it is important to understand how a trust is established and who is involved.
The process:
- A solicitor or accountant will prepare your trust deed. They outline the terms/conditions on how the trust will be maintained. Here, you will decide who is to be listed as a beneficiary.
- Keep in mind that various tax rates can apply to different beneficiaries, so you’ll need to be selective about who receives what.
- Income is usually derived from property rental, share dividends, interest earned on cash or capital gains from the sale of the assets.
- The ATO requires trustees to document all distributions prior to the end of the financial year.
- Unlike a company, all income must be distributed in the tax year it was earned.
Potential risks:
Trusts can be complex instruments, which might require some significant legal document drafting, adapting and updating as new issues emerge. Keep in mind that there are costs attached to setting up a trust, which often stem from the provision of legal/financial advice and the trust must submit a tax return in its own right every year.
You’ll also need to consider the power held by the trustee. If it’s not you, it’s important to ensure they act to benefit the beneficiaries. You may want to go so far as to appoint an independent ‘guardian’ who will have veto power over decisions that could allocate assets beyond a certain amount.
There can be a significant level of inconvenience if a trust is not managed effectively too. Therefore it’s important to seek professional advice about the suitability of creating a trust for your family.
Given how popular family trusts are in Australia, we’ll discuss them further at some point in the future, so if you’ve got a burning question, by all means let us know.
Of course, if establishing a family trust is something you’ve been thinking about, you can call Kerry on 6023 1700, drop us a note or connect with Kerry via LinkedIn.
