Australian Family Trust Explained
An Australian family trust has become a popular estate planning tool among many family groups.
Because it provides family members with a vehicle to pass control of their assets to the next generation – all while offering excellent tax benefits and asset protection strategies.
As with any investment strategy, however, family trusts come with some disadvantages.
So, here’s what you can expect when setting up an Australian family trust.
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 an expert 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
If you would like to learn more about each step, make sure to check out these nine steps on how to set up a family trust.
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.
You can access a detailed discussion of these advantages and disadvantages here.
Family trusts are attractive investment structures for many family groups when it comes to asset protection, tax benefits and managing family businesses and the financial interests of your family members.
However, setting them up and administering them accordingly can be complex and the trust laws should not be taken lightly. So it is important to consult with a financial and legal advisor to make sure the trust operates smoothly.
And while there are great tax benefits to setting up a family trust, the Australian Tax Office provides strict guidelines when it comes to tax obligations. 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 get to know you and develop strategies that consider all aspects of your business, investments, income, family, and lifestyle goals. Our emphasis is on protecting assets and taking advantage of all opportunities to minimise tax within legal constraints.
To discuss any matter relating to structuring your affairs in a family trust and minimising your tax, get in touch today.
“This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.”
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002