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.
Family trusts are also used as a vessel to pass control of the trust assets on to the children/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 or purchase investment properties. 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 is protected from 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:
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- 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 administers 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); and
- The appointor is a party to the trust that bears the power to remove and nominate trustees (when the existing trustee passes away, for example, or when they are not able to manage the trust effectively)
Who Can Be Beneficiaries of a Family Trust?
As we previously mentioned, trust beneficiaries are people (or entities) who are either named or defined as part of a class in the trust deed, who 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;
- grandchildren; and
- Grandparents
- 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. While children under 18 years old can be beneficiaries of a family discretionary trust, any income of $416 distributed to them will be taxed at a much higher rate.
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
But 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.
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.
“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
