Who Can Be a Beneficiary of a Family Trust?

Thinking of creating a trust…but not sure who can be a beneficiary of a family trust?

Family trusts have become an increasingly popular way for families to manage their wealth because they can offer excellent tax benefits and asset protection.

Families also use this type of trust structure as a vessel to pass control of the trust assets on to the children or next generation of the family.

But who exactly can be beneficiaries of family trusts?

Here’s what you need to know. 

 

What are Family Trusts?

A family trust is a type of discretionary trust set up to manage a family business or hold a family’s personal or business assets. 

It’s discretionary in nature because the trustee is given complete discretion as to how the trust income and capital is distributed to the beneficiaries. 

Using a family trust as an ownership structure means that you won’t be the legal owner of the assets but rather the beneficial owner. 

So, any assets held in the family trust are held in the name of the trustee. 

Many business owners and property investors choose to use family trusts as an asset protection vehicle to operate businesses, purchase investment properties, or manage rental income. This creates a separation between the owner of the assets and those who will benefit from it, facilitating other benefits.

As the investment property is held in the trustee’s name, not your own, the property and business are protected from frivolous creditors of the individual beneficiaries – where they become insolvent or bankrupt or are the subject of legal action.

You can read more about using family trusts for property investment in our pros and cons article. 

Who Are the Parties To Discretionary Trusts? 

Before delving into who can be beneficiaries to a family or discretionary trust, it’s worth having a basic understanding of the different parties involved in the creation and management of a trust: 

• • The settlor is the party who sets up the family trust, names the trustee, beneficiaries as well as the appointer (the settlor can’t be a beneficiary to the family trust).
  • The trustee is the party (or parties) who is legally obliged to administer the trust in accordance with the trust deed (the trust deed is the agreement that governs the operation of the family trust).
  • The beneficiaries are the parties for whose benefit the family trust is created (we’ll discuss trust beneficiaries in more detail below).

• The appointor is a party to the trust that bears the power to remove and nominate trustees (For example, in cases where the existing trustee becomes a deceased person or when they aren’t  able to manage the trust effectively, the appointer can instruct a suitable legal personal representative may step in.) 

Who Can Be Beneficiaries of a Family Trust?

As we previously mentioned, trust beneficiaries are people (or entities) who are either directly named or defined as part of a class in the trust deed. Any beneficiary named can benefit from the assets and wealth held in the family trust.

In most cases, the trustees of family trusts are usually the parents (individuals) or trustee companies they control. 

Generally, the beneficiaries of family trusts are family members or a family group, such as: 

• Parents
• Children ( including their spouses)
• Grandchildren
• Grandparents
• Brothers, sisters
• Class of beneficiaries.

Example

Mike and Jama jointly own their family business, MJ Construction. 

They have three children and are also currently looking after Jama’s mom. 

They currently have $450,000 in their savings, which they’ve decided would be way more beneficial in a family trust because they can create wealth in a lower tax environment. 

So, Mike and Jama decide to establish the Smith Family Trust. The settlor names MJ 2 Pty Ltd (new company only acting in its capacity as trustee) and the following parties as the beneficiaries: 

• Mike Smith,
• Jama Smith,

• Children of Mike & Jama and others.

The $450,000 is deposited into the Smith Family Trust and is invested in an apartment in Brisbane and some high-yielding shares to create assets of the trust. 

At the end of each financial year, the trust income generated from the assets of the trust can then be distributed to the beneficiaries family trust beneficiaries in a tax-effective way.

 

Can a Trustee Be a Beneficiary Under Discretionary Trusts? 

Yes, Australian trust law allows trustees to be beneficiaries of family or discretionary trusts. More than one individual trustee is required. Care should be taken at the planning stage to avoid unintended consequences including those associated with stamp duty.

Remember: a trustee has a legal entitlement to manage the trust, while beneficiaries have an equitable entitlement to the trust – in other words, they enjoy the benefits of the trust. 

So, if the sole trustee were to be a beneficiary, too, they would end up being the owner of the trust property because they hold a legal and equitable interest in the trust assets. The trustee also can’t be the sole beneficiary of the family trust for the same reason – they would be legally owning property for the benefit of themselves. 

To avoid this, the law requires more than one trustee and more than one beneficiary if one of the trustees were to be a beneficiary. 

So, if Mike and Jama wanted to appoint MJ 2 Pty Ltd as a beneficiary, they would be allowed to do so; however, the settlor would have to name an additional trustee who isn’t a beneficiary to the trust. 

Can Children Under 18 Years Old Be a Family Trust Beneficiary?

Yes, children under the age of 18 years old can be beneficiaries of a family trust. 

That is why the settlor of The Smith Family Trust could name Mike and Jama’s three children as beneficiaries. It is worth noting that naming minor beneficiaries in a trust deed could lead to issues with the banks. 

Unfortunately, for tax purposes, it’s worth noting that if a trustee distributes trust income over $416 to anyone younger than 18, they would end up being liable for a substantial amount of tax. 

Key Takeaways

• A family trust is a structure that allows a person or other legal entity such as a company to hold assets to the benefit of others, known as the trust beneficiaries.  
• A family trust can have various beneficiaries, including family members and any other financial dependents.  
• You need to be aware of some legal implications before deciding to have a trustee be a beneficiary of a trust. 
• While discretionary trusts have great tax benefits and other advantages, there are several considerations you’ll need to take into account before establishing a family trust.

There is no “one size fits all” when it comes to family trusts – the potential benefits and possible risks are entirely dependent on your individual circumstances. So, to determine whether a family trust is a suitable option for you, it’s ideal to consult with a tax specialist or financial advisor for advice. 

At Property Tax Specialists, our primary focus is helping property investors maximise their opportunities and protection while legally minimising their tax liabilities.

To discuss any matter relating to family trusts, protecting your assets or arranging your affairs for minimum tax, get in touch today.

FAQS

What Is the Primary Role of a Beneficiary in Any Trust?

The primary role of a beneficiary is to receive benefits, often in the form of income or assets, from the trust. They don’t manage the trust but are the reason for its existence.

How Does a Beneficiary Differ from a Trustee in a Family Trust?

While a trustee manages and oversees the trust’s operations, a beneficiary is the party that benefits from the trust’s assets or income.

What Is a Third Party Beneficiary in the Context of a Family Trust?

A third party beneficiary refers to an individual or entity that is not a direct party to the trust agreement but stands to benefit from it. For example, while a trust might be set up primarily for the benefit of immediate family members, a third party beneficiary like a charitable organisation or a distant relative could also be named to receive certain benefits.

What Is a Primary Beneficiary?

A primary beneficiary is the first in line to receive assets or benefits from a trust, will, life insurance policy, or other contractual arrangements. If they can’t claim the assets, the secondary beneficiary or contingent beneficiaries will be next in line. 

A contingent beneficiary is an individual or entity designated to receive assets or benefits if a beneficiary is unable or unwilling to claim them. This can occur if the primary beneficiary predeceases the grantor, declines the assets, or is otherwise ineligible.

How Can a Beneficiary Access Information About the Trust?

Beneficiaries have a right to certain information about the trust, including financial statements and the trust deed, to ensure their interests are protected.

What Rights Does a Beneficiary Have if They Believe the Trust Is Being Mismanaged?

Beneficiaries can seek legal recourse if they believe the trust is being mismanaged or if the trustee isn’t acting in their best interest.

Can the Terms of the Trust Limit a Beneficiary’s Rights?

Yes, the trust deed can specify certain conditions or limitations on a beneficiary’s rights. You must review the trust deed to understand these terms.

How Can a Beneficiary Be Removed from a Family Trust?

The process for removing a beneficiary typically depends on the terms outlined in the trust deed. Some trusts may allow for changes, while others might be more rigid.

Can Distributions from a Family Trust Be Tax-Free?

Yes, certain distributions from a family trust can be tax-free, depending on the nature of the assets and the structure of the trust. For example, principal distributions are typically tax-free to the beneficiary. However, the trust’s income, when distributed, might be taxable.

What Does It Mean to Be a Sole Beneficiary?

A sole beneficiary is the only person designated to receive the assets or benefits from an arrangement, such as a will or trust. They have exclusive rights to the designated assets or benefits, with no other parties sharing this entitlement.

How Can a Beneficiary Access Funds from a Bank Account?

A beneficiary can access funds from certain bank accounts if it’s designated as a “payable-on-death” (POD) account. Upon the account holder’s death, the funds are transferred directly to the named beneficiary, bypassing the deceased estate probate process.

How Is a Beneficiary Designated in a Life Insurance Policy?

In life insurance policies, a beneficiary is designated to receive the death benefit upon the policyholder’s passing. The policyholder specifies who the beneficiary is when setting up the policy and can update it as needed.

Disclaimer

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.