What Is a Family Trust and When Should You Set One Up?

When you’ve worked hard to build up your family’s wealth, you may want to consider how those assets will be managed and passed on.

A family trust in Australia can provide a way to manage assets and distribute income and capital among family members. This is one reason families often consider trusts as part of their estate planning. Before deciding whether a trust is right for your family, it helps to understand how one works and what it can offer.

Let’s look at what a family trust is, its potential benefits and the steps involved in setting one up.

So, What Exactly is a Family Trust?

A family trust is a legal arrangement that allows a trustee to hold and manage assets for the benefit of family members. For Australians looking to manage family wealth, it can offer flexibility in how income and capital are distributed among eligible beneficiaries, depending on the terms of the trust deed.

Family trusts are generally discretionary, meaning the trustee has flexibility to decide how income or capital is distributed among eligible beneficiaries, subject to the trust deed. This allows distributions to be considered in light of the family’s circumstances and financial needs.

Understanding the Key Roles in a Family Trust

Family trusts in Australia involve several parties, each with a specific role:

– The Settlor: Establishing the Trust

The settlor establishes the trust by contributing an initial amount of money and arranging for its creation. Their role is generally limited to setting it up, rather than managing its assets or deciding how distributions are made.

– The Trustee: Managing the Trust

The trustee manages the trust’s assets and makes decisions in line with the trust deed. This includes handling investments, keeping records and determining how income or capital is distributed to eligible beneficiaries.

– The Beneficiaries: Receiving Distributions

Beneficiaries are the people or entities eligible to receive income or capital from the trust, often including members of the family. Depending on the trust deed, they may receive different distributions from year to year rather than having a fixed entitlement to the trust’s income.

Benefits of Setting Up a Family Trust:

For families looking to manage their wealth and plan for the future, a trust may offer several advantages. The benefits depend on your circumstances, the trust structure and how it is managed.

• Asset protection – Holding eligible assets through a trust may help manage certain financial risks, such as those associated with business ownership. Protection, however, is not guaranteed and depends on the circumstances and applicable laws.
• Tax planning – Distributing income among eligible beneficiaries may create opportunities for tax minimisation, depending on their individual tax positions and compliance with Australian tax law.
• Planning for future generations – Families can use trusts to hold investments for the benefit of children or other eligible beneficiaries, supporting estate and family financial planning.
• Managing broader financial goals – For families with property, investments or business interests, a trust may form part of private wealth planning or high-income financial planning, depending on their financial circumstances and needs.

A Step-by-Step Guide to Setting Up a Family Trust in Australia

Step 1: Decide whether a family trust is right for you.

Start by considering your family’s financial goals, the assets you plan to hold and how you intend to distribute income or capital. A discretionary trust may offer flexibility, but it also comes with ongoing costs and responsibilities.

Professional advice can help you assess whether this structure suits your circumstances.

Step 2: Choose your trustee and beneficiaries.

The trustee manages the trust’s assets and makes decisions under the trust deed, so choose someone who understands the responsibilities involved and can act in the trust’s interests. You’ll also need to identify the beneficiaries who may receive distributions, often family members.

Step 3: Prepare the trust deed and establish the trust.

Work with a legal professional to prepare a trust deed that sets out how your family trust will operate, including the trustee’s powers and distribution rules. A settlor then contributes an initial amount to establish the trust, and the trustee formally accepts the appointment.

The deed may also need to be lodged and the stamp duty paid, depending on the relevant state or territory requirements.

Step 4: Register for tax and other requirements.

Depending on the trust’s circumstances, you may need to apply for an Australian Business Number (ABN) and a tax file number (TFN). Registration requirements vary, so expert guidance can help you understand which applications apply to your trust.

Step 5: Open a trust bank account and manage the assets.

Once the trust is established, open a bank account in the trust’s name to keep its finances separate from your personal accounts. The trustee can then arrange for assets to be held by the trust and manage them according to the trust deed.

Good record-keeping and regular reviews help ensure the trust continues to meet your family’s needs.

Common Pitfalls to Avoid

Managing a family trust in Australia comes with ongoing responsibilities, and overlooking key requirements can create legal, tax or financial complications. Being aware of these common pitfalls can help you manage the trust more effectively.

• Choosing the wrong trustee – Choose someone who actually understands their responsibilities and can manage the trust in line with the trust deed.
• Overlooking tax obligations – Keep accurate records and meet tax and reporting requirements to avoid potential penalties.
• Mixing personal and trust finances – Keep separate bank accounts and records to maintain a clear distinction between personal assets and trust assets.
• Failing to review the trust – Revisit the trust deed and arrangements as your family’s circumstances change, with professional advice where needed.

Is a Family Trust Right for Your Family?

A family trust in Australia can offer flexibility in managing assets, distributing income and planning for future generations. However, the benefits depend on your family’s circumstances, the trust structure and the responsibilities involved. Understanding these factors can help you weigh whether a trust aligns with your broader financial goals.

Setting up a trust involves legal and tax considerations, so professional guidance can help you understand your options and ongoing obligations. Rising Tide Financial can help you make informed decisions about your family’s wealth and future.

Frequently Asked Questions

How is income from a family trust taxed in Australia?

Income distributed to beneficiaries is generally taxed at their individual tax rates. The amount of tax depends on the type of income and each beneficiary’s circumstances. If income stays in the trust or goes to children under 18, different tax rules may apply.

How can a family trust help protect assets?

Holding assets in a trust may help separate them from your personal holdings and offer some protection from financial risks. For example, a family with a business may use a trust to hold certain investments separately from their business activities. However, protection depends on how the trust is set up and the circumstances involved.

Can a family trust distribute income to children under 18?

Yes, children under 18 can receive distributions from a family trust, but the tax treatment is different from that of most adult beneficiaries. Certain income distributed to minors can attract higher tax rates, although exceptions apply in some circumstances.

What happens if a family trust retains income rather than distributing it?

If income stays in the trust rather than being distributed, the trustee may be taxed on that income, potentially at the highest marginal rate. The outcome depends on the trust’s circumstances and the applicable tax rules.

How can a family trust support estate planning?

A family trust can help you manage family assets over time and plan how they may benefit future generations. It can form part of your estate planning, although a trust deed and your will serve different purposes and need to work together.

How much does it cost to set up and maintain a family trust?

The cost depends on the complexity of the trust and the professional help needed to establish it. You’ll also need to account for ongoing expenses, such as tax returns, accounting fees and administration, as well as any applicable stamp duty.