Family Trusts
What is a Family Trust?
A family trust is a legal entity where a trustee holds and manages assets on behalf of beneficiaries, typically family members. This setup can help manage and protect family wealth, ensuring it is distributed according to the family’s wishes.
Types of Family Trusts
There are several types of family trusts in Australia, including discretionary trusts, unit trusts, and hybrid trusts. Each type has its own benefits and is suited to different family and financial situations. Although in this article we will focus on family trusts.
Who would benefit from setting up a family trust?
- High-Income Professionals – High-income professionals can use family trusts to manage their wealth more effectively, reduce their tax liabilities, and protect their assets from potential creditors.
- Small Business Owners – Small business owners can benefit from family trusts by separating business assets from personal assets, which can provide protection in case of business failure or legal issues.
- Higher Net Worth Individuals – Those with a higher accumulated wealth can hold their assets in a family trust to provide better protection, estate planning benefits and the ability to split income.
What is a Trustee?
A trustee is responsible for managing the trust’s assets, making decisions in the best interests of the beneficiaries, and ensuring the trust complies with legal requirements. This role requires a high level of trust and responsibility, as the trustee must act in the best interests of the beneficiaries at all times. There are two different types of trustees being an individual trustee and the other being a corporate trustee.
Individual Trustee
An Individual trustee is just a natural person or persons who hold the legal title to trusts assets to benefit beneficiaries of the trust. For example John and Jane Smith could be individual trustees and also primary beneficiaries of their family trust. This is the most common way people set up their family trust due to its cost effectiveness, however the problem is the lack of separation between your personal assets and the trust assets.
You may see an individual family trust expressed – John Smith & Jane Smith at trust for The Smith Family Trust.
Corporate Trustee
A corporate trustee is a company that manages the trust. This option provides more protection and continuity, as the company can continue to manage the trust even if individual directors change. For example, John and Jane Smith could be appointed as directors of Smith Wealth Pty Ltd which is the trustee of the family trust, the main beneficiaries of the trust could still be John and Jane.
You may see a Corporate Trustee family trust expressed – Smith Wealth Pty Ltd at trust for The Smith Family Trust.
What is a Beneficiary?
Types of Beneficiaries
Beneficiaries can be primary (those who receive the main benefits) or secondary (those who receive benefits under certain conditions). Understanding these roles helps in planning how the trust will operate. For example, primary beneficiaries might receive regular income distributions, while secondary beneficiaries might only receive distributions under certain conditions, such as reaching a certain age or achieving a specific milestone.
Along with the mentioned primary beneficiaries it is also common to see trust deeds in Australia allowing for generic beneficiaries to be:
- Spouses
- Children, Grand Children and Great-Grand Children
- Relatives (parents, grandparents, brothers, sisters, uncles, aunts, nieces, lineal descendants, adopted children)
- Other companies related to the trustees
- Other trusts related to the trustees
Annual Distribution of Income
Every year a family trust has to elect who it is allocating income to, if no income is elected to be made to a beneficiary then the income is taxed at 47%. Distributing the trust’s income among beneficiaries is a way to minimise your overall tax burden. This can be particularly beneficial for families with members in different tax brackets. For example, if one family member is in a higher tax bracket, distributing some of the trust’s income to a member in a lower tax bracket can reduce the total tax paid.
Benefits of a Family Trust
- Tax Efficiency – Family trusts can provide significant tax benefits by allowing income splitting and taking advantage of lower tax rates for some beneficiaries. This can be particularly beneficial for high-income professionals and small business owners who are looking to reduce their tax liabilities.
- Asset Protection – Assets held in a family trust are protected from creditors, legal claims, and other risks, providing peace of mind for the family. This can be particularly important for small business owners who want to protect their personal assets from business risks.
- Estate Planning – Family trusts can be an effective tool for estate planning, ensuring that assets are distributed according to the family’s wishes and avoiding potential disputes. This can provide peace of mind for self-funded retirees who want to ensure their assets are protected for future generations.
Disadvantages of a Family Trust
- Costs and Complexity – Setting up and managing a family trust can be complex and costly, requiring professional advice and ongoing administration. This can be a significant drawback for some families, especially if the trust’s benefits do not outweigh these costs.
- Legal and Compliance Issues – Family trusts must comply with various legal requirements, which can be challenging to navigate without expert help. This includes understanding tax laws, trust deeds, and other legal obligations, which can be time-consuming and require professional assistance.
- Tax Obligations – Generally, your family trust will require annual financial statements and a tax return completed. This is generally why some families decide to hold smaller assets personally instead.
What Happens to a Family Trust if You Pass Away?
A family trust will continue to run as its own legal entity even if you pass away or lose capacity, if you pass away your family trust wont form part of your estate, however you can pass control of your trust by using a successive Trustee or successive Director legal documentation as apart of your succession planning.
- Succession Planning – Succession planning is essential to ensure the trust continues to operate smoothly after the original trustee passes away. This involves appointing successor trustees and clearly defining their roles. Without proper succession planning, the trust could face legal challenges or mismanagement.
- Appointing Successor Trustees – Choosing the right successor trustees is crucial for the trust’s continued success. Consider their experience, reliability, and understanding of the family’s needs and goals. It’s often beneficial to appoint multiple successor trustees to ensure continuity and stability.
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Conclusion
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Please note that this article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and seek professional advice before making any investment decision.
This information is true and correct as of 12 October 2024, prior to making any changes we recommend you read Government resources and seek Financial Advice prior to making any changes.