A family trust is a type of trust generally established by someone during their lifetime for the benefit of their ‘family group’. It is a discretionary trust and can be used to hold assets, run a family business, manage certain investments and support beneficiaries.
This type of trust structure is typically established for tax effectiveness and asset protection. That is, having assets in a family trust can help protect certain family assets, for example where there are vulnerable family members (e.g. spendthrifts) to ensure the assets are controlled for their benefit.
Establishing a Family Trust
A family trust can be established by what is known as a trust deed. This deed sets out the terms and conditions under which the trust operates. The trust deed is signed by the trust’s trustee/s and settlor. The settlor’s involvement is to create the trust and naming the other persons in the trust, such as the trustee/s and beneficiaries. The trustee or trustees (which may be a corporate trustee i.e. a company) are responsible for the trust and manage the assets in it. The trustee hold assets on trust for the benefit of the trust’s beneficiaries. Part of their role can include making decisions about distributions of income to beneficiaries.
There are several formal requirements of setting up a trust, including tax and duty requirements set out by the ATO and Revenue Office of the State or Territory where the trust is created, as well as payment of any relevant fees.
Advantages of Family Trusts
Some of the advantages of setting up a family trust include the following:
Family trusts can protect assets if members were to go through crisis states, such as bankruptcy or divorce. The trustee typically has discretionary powers (that is a choice about how, for example, distributions of capital and income of the trust are made). So, for discretionary family trusts, the assets are not considered to be owned by the individual beneficiaries, and therefore cannot be claimed by creditors.
In the event of a property settlement under family law, whilst the family law courts have far reaching powers and exclusion cannot be guaranteed, depending on the structuring of the trust, assets held in a family trust may have a higher likelihood of being excluded from being considered part of the matrimonial property pool.
Family trusts also provide a mechanism for the passing of assets to future generations, separate to inheritances through a Will. Therefore, it also has the potential to protects assets from estate contestation, such as challenges to a Will including by family provision claims, as the assets do not form part of the estate.
Further, these trusts can offer tax advantages. As beneficiaries pay tax on any distributions as part of their total income, the family trust can maximise the tax efficiency by distributing proportions in consideration with each beneficiary’s personal marginal tax rates. The trustee does not have to distribute the same amount to each beneficiary, and distributions can change year to year. Family trusts can also receive discounts on capital gains tax.
Potential disadvantages of Family Trusts
As much as there are tax benefits with a family trust, there are also potential disadvantages. For example, if there is any income earned by the trust that is not distributed, it is taxed at the top marginal tax rate. Distributions to minor children are also taxed at the top marginal rate after the relevant threshold is reached. The trust also cannot allocate tax losses to beneficiaries, although it may be that the tax loss can be carried forward to the next financial year, and apply it to taxable income for that year.
There are also set-up costs, such as professional costs to prepare the trust deed and ASIC fees if a corporate trustee is established, and ongoing costs (e.g. accounting costs) for maintaining and managing the trust. The extent of the costs will depend on the circumstances of each matter, but these costs can be substantially outweighed by the benefits.
How Chamberlains Can Help
The Private Wealth Law Team at Chamberlains Law Firm have legal expertise in a range of trusts and tax issues, including in relation to family trusts. If you have a family trust or are considering establishing one, we are here to help answer any of your legal questions.
*This article was prepared with the assistance of Monica Hoswell*
If you have any questions or concerns please contact our Private Wealth Director Ashleigh Blewitt on 02 6188 3600