What is a Family Trust?
A family trust is a special way to manage money and property for a family. It is set up by someone while they are alive to help their family members. A family trust can hold things like houses or money, run a family business, or take care of investments.
People usually create a family trust to save on taxes and to keep their family’s things safe. For example, if there are family members who might not manage money well, a family trust can make sure the money is looked after for their benefit.
Creating a Family Trust
A family trust can be created using a document called a trust deed. This document explains the rules for how the trust will work. The trust deed is signed by the people in charge of the trust, called trustees, and the person who sets it up, called the settlor. The settlor’s job is to start the trust and name the trustees and beneficiaries. Trustees can be people or a company. They manage the trust’s money and property for the beneficiaries. They also decide how to share the trust’s income with the beneficiaries.
To set up a trust, you need to follow some rules, including tax rules and duties from the ATO (Australian Taxation Office) and the State or Territory’s Revenue Office. There are also some fees that need to be paid.
Advantages of Family trusts
Some of the advantages of setting up a family trust include:
-Protecting assets
-Saving on taxes
-Planning for retirement savings
-Flexible investments
-Helping vulnerable family members
Family trusts can keep assets safe if family members face problems like bankruptcy or divorce. The trustee has the power to decide how to share the trust’s money and property. Because the assets belong to the trust, not the individual beneficiaries, creditors cannot claim them.
In case of a divorce, assets in a family trust might not be included as part of the property to be divided, depending on how the trust is set up.
Family trusts can also pass assets to future generations, separate from a Will. This can protect the assets from being contested in a Will dispute.
Additionally, family trusts offer tax benefits. Beneficiaries pay tax on the money they receive from the trust as part of their income. The trustee can decide how much each beneficiary gets, which can change every year. Family trusts can also get discounts on capital gains tax. One advantage (please check with your accountant before trying any of this as these conditions will vary by a lot, depending on your financial situation) is that the trustee decides how much to allocate to each beneficiary. For instance, if a beneficiary has a lower income, in some instances, the trust is allowed to allocate more income to that beneficiary. Overall, with this approach, the total effective tax rate of the family can potentially be lowered considerably.
Be aware of the potential pitfalls
While there are tax benefits with a family trust, there are also some disadvantages. For example, if the trust earns money that isn’t shared, it is taxed at the highest rate. Money given to children under 18 is also taxed at the highest rate after a certain amount. The trust cannot pass on tax losses to beneficiaries, but it can save the loss and use it next year.
Setting up a family trust costs money. You need to pay professionals to create the trust deed and pay fees if you set up a corporate trustee. There are also ongoing costs, like accounting fees, to keep the trust running. The total cost depends on your situation, but the benefits can be much greater than the costs. Usually, you will need a spreadsheet of some sort to map out exactly what you need to do next. Only then should you make the decision of going ahead with a family trust or not. There are also many other types of trusts e.g. Unit, testament and hybrid trusts. Sometimes a company (Pty Ltd) may be a more tax-advantaged structure to use. Others a combination of a family trust with a bucket company will address your tax and asset protection issues in much a better manner. Things can get very complicated very quicky when in the tax legislation arena. It is always best to consult tax professionals that specialise on trusts before making any decisions here.
My Tax Guy has a dedicated Trust Team that has expertise in many trust and tax issues, including family trusts. If you have a family trust or are thinking about setting one up, we can help answer any of your legal questions. Just complete the form at the top of the page and we will be in touch.
(However, if you wish to keep on learning about trusts, here are some more advanced & technical bits and pieces.)
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