What is a Family Trust?

Family trusts are gaining popularity among Australian families for their asset protection and tax benefits. However, understanding what a family trust is and how it works can be challenging, especially for new parents and families just starting their financial journey. This comprehensive guide aims to demystify family trusts, explaining their benefits, drawbacks, and the steps to establish one.

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What is a Family Trust?

A family trust, also known as a discretionary trust, is a legal arrangement where assets are held and managed by a trustee for the benefit of the trust’s beneficiaries. In the context of Australian law, this type of trust is frequently used to protect family wealth and optimise tax obligations.

Key Components of a Family Trust

  • Settlor: The person who establishes the trust and transfers the initial asset (usually a nominal amount) to the trustee.
  • Trustee: The individual or entity responsible for managing the trust assets in accordance with the trust deed. Trustees have the authority to distribute income or capital to beneficiaries at their discretion.
  • Beneficiaries: Individuals or entities eligible to receive benefits from the trust. In a family trust, these are usually family members.
  • Trust Deed: A legal document that outlines the terms and conditions under which the trust operates, including the powers and duties of the trustee.

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Why Consider a Family Trust?

Asset Protection

One of the primary reasons families consider establishing a family trust is asset protection. By placing assets in a trust, you can protect them from potential creditors, legal actions, or financial mishaps involving individual family members. This is particularly beneficial for business owners who may face risks in their professional endeavours.

Tax Benefits

Family trusts offer significant tax advantages. Income generated by the trust can be distributed among beneficiaries, often resulting in a lower overall taxable income. Since beneficiaries may include minors or family members in lower tax brackets, distributing income in this manner can substantially reduce the family’s total tax liability.

Estate Planning

Family trusts are invaluable tools for estate planning. They provide a structured way to pass on wealth to future generations while minimising the potential for family disputes. The trust deed can stipulate how and when beneficiaries receive their inheritance, ensuring that assets are distributed according to your wishes.

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How to Establish a Family Trust in Australia

Step 1: Consult a Financial Adviser and Lawyer

Before establishing a family trust, it is crucial to consult with a financial adviser and a lawyer specialising in trusts and estate planning. They can provide tailored advice based on your financial situation and goals.

Step 2: Create the Trust Deed

The trust deed is the foundational document of the family trust. It should be drafted by a legal professional to ensure it complies with Australian law and adequately reflects your intentions. The deed will outline the roles and responsibilities of the trustee, the rights of the beneficiaries, and the rules governing the administration of the trust.

Step 3: Appoint the Trustee

The trustee can be an individual, multiple individuals, or a corporate entity. Choosing a trustworthy and competent trustee is critical, as they will manage the trust assets and make discretionary distributions.

Step 4: Settle the Trust

The settlor formally creates the trust by transferring a nominal asset to the trustee. This act is known as ‘settling the trust,’ and it typically involves signing the trust deed and providing a token amount (often $10) to the trustee.

Step 5: Transfer Assets into the Trust

Once the trust is established, you can transfer assets into it. These assets can include property, investments, cash, or other valuable belongings. It is important to note that once assets are transferred into the trust, they are no longer legally owned by you but by the trust.

Step 6: Register the Trust with the Australian Taxation Office (ATO)

You must apply for a Tax File Number (TFN) and an Australian Business Number (ABN) for the trust. The trustee will be responsible for lodging annual tax returns and fulfilling other administrative obligations.

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Potential Drawbacks of a Family Trust

While family trusts offer numerous benefits, they are not without drawbacks. It is essential to consider these before proceeding:

  • Costs – Establishing and maintaining a family trust can be expensive. Legal and accounting fees, along with ongoing administrative costs, can add up over time.
  • Complexity – Managing a family trust can be complex, particularly for those unfamiliar with legal and financial concepts. Trustees have significant responsibilities, and failing to comply with legal requirements can have serious consequences.
  • Loss of Control – Once assets are transferred into the trust, they are no longer under your direct control. The trustee has discretion over the management and distribution of trust assets, which may be a concern for some individuals.
  • Tax Implications – While family trusts offer tax benefits, they also come with tax obligations. Trusts must lodge annual tax returns, and trustees need to be aware of the tax implications of income distributions.

 

For new parents and families in Australia, a family trust can be a powerful tool for protecting assets, minimising taxes, and planning for the future. However, it is essential to weigh the benefits against the potential drawbacks and to seek professional advice before proceeding. Understanding the intricacies of family trusts can help you make an informed decision that aligns with your family’s financial goals and legacy aspirations.

If you are considering establishing a family trust, we encourage you to consult with a legal or financial professional to ensure it is the right choice for your circumstances. With the right planning and guidance, a family trust can provide peace of mind and financial security for generations to come.

If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.

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