What is a Family Trust and What are the Benefits?
Updated 6th July, 2023.
Aside from the business off the ground, few things will make a business owner happier than experiencing steady growth and profits. Your business accountant may suggest setting up a family trust as your company and profitability expand, but what is a family trust? To learn more, read our handy guide for definitions, benefits, and considerations.
What is a Family Trust in Australia?
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. 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, 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 Setting Up a Family Trust
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 Minimising
As the trustee, you can distribute income to your beneficiaries to spread business taxes across lower tax brackets, thus minimising tax. Additionally, trust assets held for over a year can get a 50 per cent tax reduction on Capital Gains Tax that companies cannot access.
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. For information regarding refinancing a home loan through a family trust, defer to the experts at Quantum Finance for advice.
5. Retirement Planning
Because family trust funds are flexible, you can build wealth and use it along with your superannuation amounts after you retire.
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.
How to Set Up a Family Trust
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 our team today. Our professionals have years of experience in setting up trusts and will put their knowledge and skills to work for you.
The information provided in this post is for informational use only. It is not considered legally binding financial or tax advice and should not take the place of a consultation with a tax or financial professional.
How much does it cost to set up a family trust in Australia?
Setup costs differ between family trusts and trusts with a corporate trustee. For accurate pricing information, seek the guidance of a professional accountant.
Who establishes a family trust in Australia?
In Australia, family trusts are established by trustees, typically parents. The trustees can fill their family trust with profit from their family business, and the trust will then distribute that income to its beneficiaries: the children, grandchildren, and their spouses.
What is a trustee?
A trustee is a person or entity that holds legal title to property for the benefit of another person or group of people, known as the beneficiaries.
What is the difference between a testamentary trust and a living trust?
A testamentary trust, also known as an after-death trust, is created by the settlor’s will, which transfers property to the trust. A living trust, also known as an inter vivos trust, is created during the lifetime of the grantor when all or part of the grantor’s property is transferred into the trust.
Can the beneficiaries of a trust all be from different families?
No, the beneficiaries of a trust do not all have to be from the same family.
What is the role of a trustee in a trust?
The trustee holds legal title to the property and manages it for the benefit of the beneficiaries.
How can I set up a family trust in Australia?
Setting up a family trust in Australia can be a complicated process, so it’s important to proceed with caution and purpose. It’s recommended to seek the advice of a legal professional or financial advisor who specialises in trusts.