Family trust benefits can have significant positive impacts on your family finances.
In the most recent study on trusts by RMIT University, it was reported that there were nearly 850,000 trusts during the 2015 – 16 financial year in Australia – that’s one trust for every 29 people at the time. The cumulative value of the assets totalled $3 trillion.
The same report estimates that between $672 million to $1.2 billion of tax revenue is being sheltered annually using trusts.
So why are so many Australians using family trusts and what benefits do they afford families?
In this guide, we’ll explain why so many Australians are using family trusts and what benefits (and disadvantages) of having a family trust are.
- 1 What is a Family Trust?
- 2 Common Reasons for Setting up a Family Trust
- 3 Key Components of a Family Trust
- 4 Family Trust Benefits
- 5 Family Trust Disadvantages
- 6 Key Takeaways
What is a Family Trust?
A family trust or a discretionary trust is set up to hold a family’s personal or business assets. It can also operate a family business.
Common Reasons for Setting up a Family Trust
There are several reasons for setting up a family trust. These can include:
- Property Investment
- Business Investment
- Manage Family Income: usually to distribute income to a beneficiary at a particular point in their life
Key Components of a Family Trust
Every family trust features these key components:
- The Settlor: this is the person establishing the family trust. They cannot be a beneficiary if they’re the settlor
- Trust Deed: think of it as the rulebook or terms and conditions of the trust
- The Trustee: this is the ultimate controller of the trust. This individual or entity is responsible for the assets
- The Beneficiaries: as the name suggestions, these are the individuals (usually family members) who benefit from the trust.
Family Trust Benefits
A family trust can provide significant benefits when executed in the right way:
If you, as the settlor, hold your assets within the trust rather than under your own name, your assets cannot be used to settle the debt owed.
Because the assets are owned by the trustee, if the individual beneficiaries experiences business failure or debt issues, the assets owned by the trust cannot be used to pay the creditors of individual beneficiaries.
Effective Tax Planning
There can be significant tax benefits to re-distributing income if you have beneficiaries who are may have income in the lower tax bracket.
For example, if you have beneficiaries who are low-income earners, by distributing income to them, you could be paying a lower total amount of tax in the family. This is also often used to help with supporting a child’s university studies or older parents who are retired.
However, we strongly suggest you speak to an accountant as there are tax laws related to the re-distribution of income through trusts that can have negative consequences if not executed properly.
Flexibility to Distribute Income
Having the ability to distribute income from the trust means that you can protect vulnerable family members by only distributing income to them at a certain point in their life.
For example, eliminating risks of family members who may have poor spending habits from accessing capital that they would otherwise use up quickly.
Many families also use family trusts as a method for succession planning by giving access to more capital when children become older.
Be aware that the ATO has recently been cracking down on payments on trusts where the money is not actually being paid but remains in the trust.
Access the 50% CGT Discount
If the trust has owned an asset for more than 12 months, unlike a company, it can benefit from receiving a 50% discount on an asset at the time of disposing of it.
Family Trust Disadvantages
Family trusts also have drawbacks to consider:
Family Trusts are Highly Complex & Costly
The average cost of setting up a discretionary trust is approximately $2,000 – $2,500. On top of this, you may need to set up a corporate trustee for additional protection which has additional setup costs.
For ongoing costs, you need to ensure that admin work is being conducted such as bookkeeping and accounting. This can cost you anywhere between $1,000 – $3,000 a year.
A cost-benefit analysis for your financial situation should be assessed by a lawyer or accountant to determine if a family trust structure is suitable for you and your family.
Loss of Asset Ownership in a Family Trust
The settlor does lose personal ownership of assets when they’re managed through a family trust. Instead, the trustee becomes the legal owner of these assets.
No Land Tax-Free Threshold (some states)
In some states, owning properties with a family trust means that your property is not eligible for the land tax-free threshold.
We highly recommend you check with your relevant state revenue department website or consult an accountant. This may result in a higher amount of land tax to be paid per year.
Poor Execution = Paying More Tax in a Family Trust
Without effective tax planning or execution, the income made on your family trust could be taxed at the highest tax bracket of 45%.
This is often the case if you are not distributing the trusts’ income and simply retaining the earnings within the trust.
Also, distributions for minor children (under 18) are taxed at up to 66%. This is also applicable for payments outside of the elected beneficiaries:
“A consequence of making a family trust election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy.”
A family trust structure clearly has significant benefits in asset protection, wealth distribution and tax planning. However, there are certain situations that they may not provide the benefits you may expect. This is entirely influenced by a person’s individual circumstances and would require a qualified lawyer or accountant to assess this to determine if a family trust is a suitable option.
Box Advisory Services have set up hundreds of family trusts for their clients. To find out how we can help you, book in a free consultation with us to assess your situation.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your business affairs.