The 9 Steps on How to Set Up a Family Trust
Family trusts are a type of discretionary trust set up to manage a family business or hold family assets.
Setting up a family trust can be complicated, but if done correctly, has many benefits, including:
- minimising the general tax obligations of the family group who benefit from the trust,
- asset protection, and
- succession planning
It’s never too early to think about how you can protect your loved ones financially. So, In this article, we will walk you through the nine steps on how to set up a family trust.
Step 1: Determine if a Discretionary Trust Best Suits Your Circumstances
Discretionary trust structures (such as family trusts) have become increasingly popular when it comes to asset protection, tax benefits and managing family businesses and the financial interests of your family members.
However, as with all investment strategies and structures, there are substantial perks and potential pitfalls. So, you need to weigh up all your options before opting for a trust structure strategy for your family group.
For more information on what to factor in when making your investment strategy decision, check out these six family trust advantages and disadvantages.
You’ll also need to ensure that you can cover the costs of setting up a family trust. You’ll need to consult a tax advisor such as us at Property Tax Specialists requesting a fee proposal inclusive of stamp duty, documentation fees and GST.
Step 2: Select Your Trustee
The trustee is the person or legal entity who will administer your family trust. So, they are responsible for ensuring that the trust is managed according to the trust deed.
What’s more, the trustee is given complete discretion as to how the trust income and capital is distributed to the beneficiaries.
According to trust law, the trustee can be an individual, several individuals (i.e. trustees) or a private company (i.e. a corporate trustee or trustee company).
If you decide to go with a corporate trustee, a trustee company will need to be incorporated to administer your family trust. However, while it may be slightly more costly to appoint a corporate trustee, the risk of being personally liable for trust debt is significantly reduced.
Suppose you decide to appoint an individual (or several individuals) as your trustee. In that case, you should consider appointing someone you can trust to be impartial and who will administer the family trust in the best interests of the beneficiaries.
Step 3: Identify the Trust Beneficiaries
Trust beneficiaries are the people nominated during formation and 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 a company they control.
So, generally, the beneficiaries of family trusts are family members or a family group, such as:
- grandchildren; and
- Class of beneficiaries
Unnamed beneficiaries can also be included during the family trust formation. For example, suppose you would like to include your child’s future husband or wife and their children as beneficiaries of the family trust. In that case, they can be initially appointed as a class of beneficiaries (spouses).
Step 4: Draw Up a Discretionary Trust Deed
The trust deed is essentially the terms and conditions of the family trust – it’s the legal agreement that sets forth how the family trust will operate and how the trustee is required to administer the family trust.
Each trust deed must be set up according to the financial goals of your family trust, and so it must be tailored to your family’s circumstances
As a result, it’s necessary to consult with a professional to get legal advice to help you establish how to set up a family trust deed to satisfy your requirements and the trust law compliance regulations.
Step 5: Appoint the Trust Fund Settlor and Complete Settlement
The settlor is the person responsible for:
- handing over the initial trust settlement sum (generally $10-$100) to the trustee,
- signing the trust deed, and
- authorising the trustee to manage the trust.
The settlor can be a friend, a financial advisor or a legal representative. However, for tax purposes, the settlor should not be a beneficiary of the family trust.
Once the trustee has officially agreed to act in accordance with the trust deed, the family trust is established and has no further involvement in the family trust after the settlement step.
Step 6: Trustee Meeting
Once the settlement has been made, the trustees must convene a meeting of the directors of a corporate trustee with the beneficiaries. The trustee will formally accept their appointment at the meeting and agree to be bound by the terms and conditions outlined in the family trust deed.
Step 7: Lodge Trust Deed and Pay Stamp Duty
Depending on what State or Territory you’re settling the family trust in, you may need to pay stamp duty.
For example, in New South Wales, each newly established trust must pay $500 in stamp duty.
You can calculate your stamp duty requirements by visiting each state or territory’s relevant revenue authority:
Step 8: Apply For Trust ABN and TFN
Once you’ve lodged your family trust deed with the relevant state authority, you’ll need to register for an Australian Business Number (ABN) and a Tax File Number (TFN).
Step 9: Open a Trust Bank Account
The final step in how to set up a family trust involves opening a bank account for the trust under the trustee’s name (as trustee for the trust).
Once the bank account is opened, the trustee should deposit the initial settlement sum amount before making any other deposits and entering any other transactions.
Once you’ve followed all nine steps on how to set up a family trust, your family trust will be fully operational and can start accepting gifts, make investments and borrow money in accordance with the trust deed.
The most common way of utilising a family trust as an effective tax structure is to distribute more income to beneficiaries with a lower marginal tax rate because they’ll pay tax at a reduced amount than beneficiaries in a higher tax bracket.
Beyond effectively structuring income distributions, there are a few additional tax and asset protection benefits for assets held in the family trust.
Once you’ve set up your family trust, it’s ideal to consult with a property tax accountant for personal tax advice – especially if you will be using your family trust for property investing.
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 how to set up a family trust, protecting your trust assets or arranging your trust to be a tax-effective structure, 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