The Ultimate Guide on How to Transfer Assets into a Family Trust
When it comes to transferring assets into a family trust, many considerations need to be taken into account.
While family trusts are well-known for their tax benefits and asset protection advantages, transferring existing assets into one can be tricky.
For starters, it’s worth noting that the transfer is likely to trigger capital gains taxes and the trust will have to pay stamp duty.
So, this guide will take you through how to transfer assets into a family trust and what you need to consider before doing so.
Here’s what you need to know.
What Is a Family Trust?
Before jumping into how to transfer assets into a family trust, it’s good to have a foundational understanding of what a family trust (discretionary trust) is and how it operates.
A family trust (otherwise known as a discretionary trust) is a legal structure that allows you to protect and manage your family assets or family business for the benefit of yourself, your spouse or any children. It does this by holding those assets in the name of the trust rather than your own.
In other words, assets held within a family trust are not owned by any single individual but rather belong to the trust. Therefore, the trustee has the discretion to distribute income or capital to any of the beneficiaries.
The principal distinguishing feature of a family trust is that it’s discretionary in nature. This means that the trustee can exercise their discretion (in accordance with the family trust deed) when deciding on how to distribute the trust capital and income among the beneficiaries.
So, family trusts have many benefits, including:
- minimising the general tax obligations of the family group who benefit from the trust,
- asset protection, and
- estate planning.
If you would like to know more about setting up a family trust, here’s how the setup process works in nine steps.
How To Transfer Assets into a Family Trust?
Suppose you’ve set up a family trust because you’ve considered it to be a viable asset protection structure for your future investments. If that’s the case, you can simply go ahead and use the trust as a vehicle to purchase your next asset.
However, if you’re looking for asset protection strategies for investment properties you already own, how do you go about transferring existing assets, such as property, into your new family trust?
Well, you do this by transferring the title of the property to the trust. So transferring your individually owned property title essentially means that you’re transferring the interest in that property to the trustee.
The trustee will become the new legal owner of those assets – hence why families and business owners continue to use trusts for asset protection.
You can transfer the property title to the trust by either selling the property to the trust or gifting it to the trust. Both may have CGT and stamp duty implications.
Gifting Property To Family Trust
The first option you can choose when transferring the property title is to gift it to the trustee. The trustee and the trust will have to sign a “gift deed”, which establishes that the ownership of the property is being transferred without payment.
If you still have an outstanding home loan on the property, and the loan is being transferred to the family trust, the trustee will have to undergo the loan approval process – so it’s slightly more complex.
You’ll need to engage the services of a mortgage broker and solicitor or conveyancer for legal advice on how to navigate the challenges of gifting property with an outstanding loan.
Selling Property To a Family Trust
The second option is selling the property to the family trust. This process would be the same as a buyer and seller entering into a contract of sale – you would be the seller, and the trustee would be the buyer.
You can either sell the property at market value or below market value.
In other words, you could choose to make a profit from the sale of the property by selling it at market value, or you could sell it to the trust at a price that will be enough to pay off the existing mortgage.
Either way, your CGT liability will be at the market value price (see discussion below).
It would be wise to consult a financial advisor or tax agent like us at Property Tax Specialists for tax advice regarding the best sale option for your circumstances.
Capital Gains Tax and Stamp Duty on the Transfer of Assets into a Family Trust
One major drawback of transferring legal ownership of your assets into a family trust for asset protection and estate planning is the potential capital gains tax and stamp duty liability.
Pay Capital Gains Tax
Whether the property is gifted or sold, the title transfer will still trigger capital gains tax.
Thankfully, depending on your circumstances, you may be eligible for a CGT discount. For example, the main residence property is usually exempt from tax when making a capital gain on its sale.
And if you’ve held an investment property for 12 months or more before transferring it to the trust, you may qualify for a 50% discount on CGT.
If you would like to know more about the basics of CGT, make sure to check out our guide on capital gains tax on property sales in Australia.
Stamp Duty Obligations
Stamp duty is a government-levied tax that the buyer has to pay on the transfer of property. Each State and Territory determines their own stamp duty rates.
As with capital gains tax, you may be exempt from paying stamp duty depending on the State or Territory’s property threshold, whether you’re a first-time buyer or not, and if the home is the main residence.
You can access stamp duty fees on each State or Territory’s revenue office website:
However, you’ll need to seek the services of a solicitor or conveyancer who will advise on whether stamp duty is payable on the transfer of assets into your family trust.
What Else Should You Consider?
Transferring assets into a family trust can be a costly exercise.
There are alternative strategies to achieve asset protection without transferring the asset into your family trust, depending on the circumstances.
However, these strategies are slightly more complex than a direct gift or sale to the trust. So, if you would like to weigh up the various options for your specific circumstances, you’ll need to consult a financial advisor or tax agent.
Transferring property into a family trust works similarly to any transfer of property title – you can either choose to gift the property to the trust or enter into a contract of sale.
However, beyond the asset protection and estate planning benefits, an important consideration you need to factor in is that the transfer of assets into the family trust is likely to trigger capital gains tax liability and stamp duty obligations.
There are also several advantages and potential pitfalls that you need to consider when opting for a family trust structure.
For example, the land tax threshold in some states is not applicable for properties owned by a trust. In addition, in New South Wales and Victoria, a family trust doesn’t qualify for a land tax free threshold.
So, before setting up a family trust and bearing the cost of transferring your assets into the trust, you’ll need to establish whether a family trust is a suitable option for you.
The best way to do this is by engaging the services of a tax specialist or financial advisor.
Here at Property Tax Specialist, we focus on a holistic approach to investing. We’ll get to know potential property investors and develop strategies that consider all aspects of their 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.
So, if you would like to discuss any matter relating to structuring your property ownership within a trust, tax planning, protecting your assets or arranging your taxable income for minimum tax, get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate at time of writing. You should note, however, that the information is intended as a general guide only, providing an overview of general information available to property buyers and investors. This 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.