If you’ve heard that a family trust might be of benefit to you, read on for an explanation of what a family trust is, if there is a difference between family trusts and discretionary trusts, and how you can go about setting up a family trust.
What is a family trust?
Also known as a discretionary trust, a family trust is set up to benefit the members of a family or group. It offers a way to share a tax burden among family members and also protect family assets. It is usually a trust that allows for income or capital can be distributed to beneficiaries, after the settlor progressively transfers their assets to the trust. This means the settlor legally owns no assets but still has some control over (and benefits from) these assets. As such, the beneficiaries have no interest in the trust’s property until the trustee (usually the company employed) deems so.
Many people start to think about family trusts in their forties and fifties – they can be set up while the settlor is alive, and instructions left in the Will as to how assets are divided or benefits allocated. However, it may be prudent to establish a family trust earlier than this in some cases: to reduce the tax one person may pay by sharing the income with other family members in a lower tax bracket.
A discretionary trust is one of the most common structures for small businesses in Australia. It can be a smart way to protect your assets and care for members of the trust. Be aware, however, that you do not own the trust – you just control it. When you die you do not pass on your assets – you bequeath their control. (This can have positive implications for Capital Gains Tax).
The difference between a family trust and discretionary trust
Although the terms “family trust” and “discretionary trust” are often used as if they were interchangeable, where tax is concerned, a family trust must have undergone a family trust election. The Australian Taxation Office has more detailed information about this and family trust distribution tax.
Benefits of family trusts
The family trust is a useful model to employ if capital growth or income-generating assets are held by your family. The following is a list of the main benefits:
- Protection of Assets. Bankruptcy and insolvency can be warded off.
- Cost. As well as being a relatively simple structure, the costs are low.
- Income Streaming. One sort of income can be directed towards one person, another type to another person. This also means income can be directed to members of the family on lower tax rates.
- Regulation. There is far less regulation than with a company.
- Tailoring. The trust deed can be tailored to specific needs.
Starting a family trust
To begin a family trust, a settlor must give the trustee money or property for the beneficiaries’ benefit. (Note: although not the beneficial owner of the trust, the trustee is the legal owner.) The trustee can be a company or an individual.
The settlor should not be a beneficiary or an accountant and is normally a family friend. It is then the trustee’s duty to obey the terms of the trust. More information on family trusts is available from the National Tax and Accountants Association (NTAA).
Before you move forward get some proper advice about the financial and tax implications. After that, you can enlist professional help to set up your trust or create your own DIY family trust. Various expert law service agencies offer online assistance and their prices can be very competitive – from $275. For complex estates and tax situations, and if the trust is to serve multiple purposes, it may be better to seek assistance.
