Explained: Family Trust Australia

family trust

Explained: Family Trust Australia

A family trust in Australia has become a popular estate planning tool among many family groups.

Why? This strategy allows families to pass on their assets to the next generation. It has tax benefits and protects their assets. 

As with any investment strategy, however, family trusts have disadvantages. 

So, here’s what you can expect when setting up a family trust. 

What is a Family Trust?

A family trust is a way to hold family assets and manage a business for the beneficiaries. 

A family trust is a discretionary trust. The trustee or trustees can decide how to give money and property to beneficiaries. 

Who are the Family Members and Other Parties to the Trust?

To understand how a family trust works, you’ll need to have a basic idea of who is involved in the set-up and management of the trust: 

  • The trustee is the person or company that runs your family trust based on the trust deed.
  • The settlor is the person responsible for signing the trust deed and authorising the trustee to manage the trust,
  • The beneficiaries are chosen during the family trust election to receive the assets and wealth held in the family trust.
  • The appointor can remove and nominate trustees when the original trustee dies or can’t fulfil their role. 

Characteristics of Discretionary Trusts 

Because family trust structures are considered discretionary, they possess the following characteristics: 

  • The trustee (or trustees) can be an individual or a company (corporate trustee).
  • The people who benefit from the family trust don’t automatically own the property.
  • Trustees have full control over how income and capital are given to beneficiaries.
  • Minors can be named beneficiaries (although distributions to minors can be taxed up to 66%).

trust agreement

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.

Since each family’s situation is different, it’s important to seek guidance from a financial expert or tax agent. They can help you navigate through the necessary 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: If you use a trust to own your family’s assets and family business, you won’t be the legal owner. Instead, you’ll be the beneficial owner.
  • Tax-effective structure: The most common way to use a family trust for tax purposes is to give more taxable income to beneficiaries with a lower tax rate. They will pay less tax than beneficiaries with the highest tax rate.
  • The trust structure of succession planning helps child beneficiaries access trust capital when they are older. This allows them to fund their studies.
  • Estate planning can be simplified with a family trust. The trust deed establishes rules and roles for everyone involved. 

What are Some Family Trust Disadvantages?

While family trusts have significant 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. 
  • If your trustee doesn’t structure the family trust properly, you may have undistributed income. This means the trust will have to pay a higher tax rate. 
  • Trust losses are trapped:  if your trust assets run at a loss, you can’t subtract these losses from your taxable income.
  • If your family trust buys property in certain states or territories, you may not qualify for the tax-free land threshold for land tax. 

Key Takeaways

Lots of families like these discretionary structures because they can protect assets and have tax benefits. They can also help manage family businesses and finances. 

To ensure smooth operation, it is important to establish and manage trusts correctly. Trust laws are complex and important, so consulting with a financial and legal advisor is crucial.

Setting up a family trust has tax benefits. However, the Australian Tax Office has strict guidelines for taxes. So, you’ll need to seek professional advice from a tax specialist to help maximise your tax advantages and meet your tax commitments. 

At Property Tax Specialists, we’re used to dealing with complex investment portfolios. So, we know the best way to structure them to reduce the amount of tax you pay legally.

We’ll learn about you and create strategies for your business, investments, income, family, and lifestyle goals. We focus on protecting assets and maximising tax savings within the law.

To discuss any matter relating to structuring your affairs in a family trust and minimising your tax, get in touch today.


How Does a Family Trust Work in Australia?

A family trust is a discretionary trust structure that allows a trustee to hold assets or run a family business on behalf of the trust’s beneficiaries. The trustee has full discretion over how to distribute the trust’s income and capital gains to the beneficiaries each year. This discretionary nature allows trustees to distribute funds in the most tax-effective way among beneficiaries.

Is It Worth Setting Up a Family Trust Australia?

For many Australian families, setting up a family trust can provide excellent tax planning and asset protection benefits. A family trust allows you to distribute income to family members in lower tax brackets, potentially reducing the overall tax paid. It also protects assets like a family business or investments from bankruptcy or lawsuits. However, there are costs in establishing and maintaining a trust, so the benefits need to outweigh these expenses.

What Are the Risks of a Family Trust?

Some potential risks include loss of control over assets, higher tax rates if income stays undistributed, and family disputes over distributions. Strict regulations also apply, so mistakes can trigger severe tax penalties. A poorly structured trust deed can undermine asset protection. Ongoing accounting and tax compliance costs need to be factored in as well.

How Much Tax Does a Family Trust Pay in Australia?

A family trust does not pay income tax directly. The beneficiaries pay tax on distributions they receive from the trust at their personal marginal tax rates. However, if income remains undistributed in the trust, the trust will pay tax at the top marginal rate of 45% plus the Medicare levy. Proper structuring to distribute income each year is key to maximise tax effectiveness.

What Is a Trust?

A trust is a structure where the legal and beneficial ownership of assets are separated. A trustee legally owns and controls assets but for the benefit of beneficiaries. This allows the trustee to manage assets on behalf of beneficiaries based on a trust deed. These structures can be set up for many purposes like managing inheritance, reducing tax or protecting assets. A family trust is a type of discretionary trust used for estate planning and asset protection.

What is a Corporate Trustee?

A corporate trustee is when a company acts as the trustee of a trust, rather than an individual. Appointing a corporate trustee for a family trust can provide additional asset protection benefits. If an individual trustee is sued or goes bankrupt, the assets owned by the trust could be at risk. With a corporate trustee, the liability is limited to the company’s assets, not the trust’s assets.

Is a Family Trust Good for Asset Protection?

Yes, a properly structured family trust can provide excellent asset protection for the family group. Assets transferred to or acquired by the trust belong to the trustee, not the beneficiaries. This helps shield assets from creditors and lawsuits targeted at the beneficiaries personally. A corporate trustee also limits liability. Distributions can be controlled by the trustee as well for protection.

What is a Trust Deed?

The trust deed is the legal document that establishes the trust and outlines how it must operate. It names the trustee and appointor, identifies the beneficiaries, sets out the trustee’s powers and obligations, and specifies how the trust’s income and assets can be distributed. Having a comprehensive and well-drafted trust deed is essential for any family trust to function effectively and achieve asset protection goals.

Do Family Trusts Pay Capital Gains Tax?

No, they do not directly pay capital gains tax (CGT). When a family trust sells a capital asset like property or shares and makes a capital gain, the trust itself does not pay tax on the gain. Instead, the capital gain is allocated to the beneficiaries who are ‘presently entitled’ to trust income in that year. These beneficiaries then include the capital gain in their personal tax return and pay CGT accordingly.


Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.

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