What You Need to Know Before Setting Up a Family Trust

In order to make sure your trust is exactly what you want, it’s important to choose the right service for the right reasons.

Aside from the business off the ground, few things will make a business owner happier than experiencing steady growth and profits. Your financial specialist may suggest setting up a family trust as your company and profitability expand. While it is likely, you have heard the term. You may not be sure what a family trust is or if this is a wise action for your company. There are several pros and cons to consider before you begin setting up trust accounts.

What is a Trust?

According to The Australian Taxation Office, a trust is created when there is a separation of the legal ownership from the real ownership of an asset. In simpler terms, a trust is a formal relationship where the trust maker names an individual to serve as a trustee. The trustee must manage trust accounts and property for the good of the trust maker and other beneficiaries.

What are the Three Types of Trusts?

1. A Family Trust

Also known as a discretionary trust, a family trust is the type of trust account that is used most in Australia. Typically, this type of trust is set up to hold a family’s business or other assets. The trust protects the family assets and helps with family tax planning. The family trust is often the choice of small to medium-sized business owners as well as medical professionals, investors, and other professionals.

Income from the business can be distributed to beneficiaries in lower tax brackets. This significantly reduces taxes. The distribution of funds is at the trustee’s discretion, and no beneficiary can claim a certain amount of money.

2. Unit Trust

A unit trust is set up somewhat like a company. The property is divided into shares called units. The unit holders’ power in the company is based on the number of units they own.

Unit trusts do not offer the same degree of protection as family trust accounts. For example, if a unit holder goes bankrupt, their units will be sold along with other assets to repay debts.

3. Hybrid Trust

A hybrid trust combines the most useful features of the family and unit trusts. A single trust account can have unit holders as well as a distribution of funds to beneficiaries in low tax brackets.

Five Benefits of a Family Trust

1. Protection – Because assets held in a trust account do not belong to any individual, the assets are safe should one beneficiary have legal troubles.
2. Tax Optimisation – Beneficiaries can receive their money from a trust in ways that spread business taxes across lower tax brackets. Additionally, assets held in trust for over a year can get a 50 per cent tax reduction on Capital Gains Tax that companies cannot obtain.
3. Control – Managing assets is much more straightforward when a trustee can definitively say how assets are distributed. This is particularly helpful when sorting out multiple spouses and children from various relationships.
4. Increased Property Investment Flexibility – The rules for property holdings are less restrictive than for individuals. This makes it possible to obtain property through a family trust you could not purchase on your own.
5. Retirement Planning – Because family trusts are flexible, you can build wealth and use it along with your superannuation amounts after you retire.

With proper retirement planning, an individual can estimate how quickly and how likely they can achieve retirement goals.

Why a Family Trust May Not be Your Best Option

While family trusts have significant benefits, there are some situations when setting up a trust account may not be your best choice.

  • Costs – While you may not think about it, managing a family trust can be expensive. As your trust becomes more complex, the cost of maintaining it will continue to rise. There may come a time when the maintenance costs outweigh the trust benefits.
  • Personal Interactions – In a perfect world, all trust beneficiaries would be kind and cooperative. However, disputes happen, marriages dissolve, and relationships that seem solid can crumble. The death of trustees, bankruptcies, and challenges to family members’ will also create havoc for those tasked with maintaining a family trust. All types of issues can make a family trust more trouble than you feel it is worth.
  • Taxes and Income – While family trusts typically offer tax benefits, there are a few situations where this is not the case. Income earned by a trust and not distributed to beneficiaries will be taxed at the highest marginal tax rate. Additionally, income given to minor children will be taxed at the highest marginal rate, plus the Medicare levy.

Choosing to set up a trust account is a big decision that typically requires a financial professional’s assistance. To learn more about creating a trust and the options available, contact the team at M2 Corporate. Our professionals have years of experience in setting up trusts and will put their knowledge and skills to work for you.