Lexi Webster
Setting up a family trust in Australia can be a complex process, but with the right advice and guidance, it can be a powerful way to protect and grow your wealth. A trust is a legal relationship where one party, the trustee, holds something for the benefit of another, the beneficiary. Trusts are routinely used as an investment or trading vehicle and can be a helpful way to structure your finances, especially if you run a small business or want to distribute property to family members. There are several types of family trusts in Australia, each with its own advantages and disadvantages. Discretionary trusts are the most common, offering the greatest flexibility in distributing income and capital. Unit trusts, on the other hand, provide more certainty for beneficiaries by assigning fixed entitlements to trust assets.
| Characteristics | Values |
|---|---|
| Type of trust | Discretionary trust, unit trust, hybrid trust, testamentary trust, special disability trust |
| Purpose | Protect and grow wealth, separate assets from estate or portfolio, shield assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits, pass on assets to chosen beneficiaries, tax planning |
| Trustee | Can be an individual or a corporate trustee, must have an Australian address, can be the beneficiary but cannot be the only beneficiary |
| Beneficiaries | Immediate and extended family members, can be a broad class, can be excluded for certain reasons (e.g. drug or alcohol dependencies) |
| Cost | $1,500 (plus GST) in legal documentation, $2,500 (plus GST) for a trust with a corporate trustee, $100,000 in a year distributed to two adult beneficiaries in lower tax brackets can save tax |
| Registration | Apply for an Australian Business Number (ABN) and a Tax File Number (TFN), open a bank account in the trustee's name, register as a company depending on type and complexity |
| Stamp duty | Varies by state, VIC: $200, NSW: $882, ACT: no charge |
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What You'll Learn
Understanding trusts
A trust is a legal relationship where one party holds something for the benefit of another. The person who holds the trust property is called the trustee, and those who receive the property are called the beneficiaries. Trusts are often used as an investment or trading vehicle and can be a helpful way to structure your finances, especially if you run a small business or want to distribute property to family members.
There are several types of trusts in Australia, each with its own advantages and disadvantages. The most common type is a discretionary trust, which allows trustees to decide how to distribute income and capital to beneficiaries. Discretionary trusts are also referred to as family trusts, as they are commonly used by families to manage their finances and pass down wealth to the next generation. In a discretionary trust, the trustee has the discretion to decide which beneficiaries will receive distributions and how often payouts occur.
Another type of trust is a unit trust, also known as a fixed trust. In a unit trust, the trustee generally does not hold discretion over the distribution of assets. Instead, the trust property is divided into units, and each beneficiary owns a given number of those units. At the end of each year, each beneficiary receives a distribution based on the number of units they hold.
Other types of trusts include hybrid trusts (a combination of discretionary and unit trusts), testamentary trusts (created through a will), and special disability trusts (for beneficiaries with severe disabilities).
Trusts can provide tax planning opportunities by allowing income to be distributed to beneficiaries in lower tax brackets. However, it's important to understand the tax implications of setting up a trust, as they are not taxed as separate entities in Australia. Instead, the trust's income is distributed to the beneficiaries, who are then taxed at their individual marginal tax rates. Additionally, there may be capital gains tax implications when assets are transferred into or out of a trust.
Setting up a trust can be a complex process, and it's important to seek professional advice to ensure that the trust is structured in a way that meets your specific needs and goals.
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Choosing a trustee
There are several options to consider when choosing a trustee:
- Non-professional trustee: This can be a family member or any other individual who is not a professional in a related field. While a non-professional trustee may not have specialized knowledge or experience, they may be a suitable choice if they are trusted and reliable.
- Professional trustee: A professional trustee can be a lawyer, accountant, investment adviser, or another qualified professional. They can provide expertise and guidance in managing the trust's assets and ensuring compliance with legal and financial requirements.
- Corporate trustee: A corporate trustee is a company or firm, such as a bank or a corporate advisory firm, that acts as the trustee. Corporate trustees can offer specialized knowledge, administrative support, and continuity in managing the trust's assets.
When selecting a trustee, it is important to consider the nature and complexity of the trust's assets, the level of expertise required, and the level of involvement desired by the settlor. In some cases, individuals may choose to act as their own trustees, especially if they have the necessary knowledge and time to manage the trust effectively. In other cases, a third party may be preferred to provide an objective view and specialized expertise.
It is worth noting that, regardless of who is chosen as the trustee, they must have an Australian address due to governance responsibilities and legal jurisdiction. Additionally, while a trustee can also be a beneficiary, they cannot be the sole beneficiary of the trust.
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Selecting beneficiaries
The definition of a beneficiary in most family trust deeds is very broad, and there may be a large pool of beneficiaries to choose from. It is important to carefully consider who you want your beneficiaries to be and to seek professional advice if needed. You may also want to consider including provisions for excluding certain beneficiaries, such as those with drug or alcohol dependencies.
In some cases, the beneficiary must be assessed as severely disabled per the requirements of the trust's legislation. This is known as a special disability trust. Family members can then make private financial contributions for the current and future care of the beneficiary.
Once beneficiaries have been selected, the trust deed will outline the rules and terms of the trust, including the rights of the beneficiaries and how the trust assets will be distributed. The trust deed should be drafted by a qualified legal professional to ensure it is legally valid and tailored to your specific needs.
It is also important to consider the tax implications of selecting beneficiaries. In Australia, family trusts are not taxed as separate entities. Instead, the trust's income is distributed to the beneficiaries, who are then taxed at their individual marginal tax rates. This can provide tax planning opportunities by distributing income to beneficiaries in lower tax brackets.
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Legal documentation
The legal documentation required to set up a family trust in Australia varies depending on the type of trust and the complexity of your assets and financial goals. The most common type of family trust is a discretionary trust, which allows the trustee to decide how to distribute income and capital among beneficiaries. Other types of trusts include unit trusts, hybrid trusts, testamentary trusts, and special disability trusts.
The cost of setting up a family trust in Australia typically starts at $1,500 plus GST for legal documentation, or $2,500 plus GST for a trust with a corporate trustee. However, there is no fixed cost, and the price can vary based on the complexity of the trust structure.
The trust deed is the most important legal document when setting up a family trust. It outlines the rules and terms of the trust, including the powers and responsibilities of the trustee, the rights of the beneficiaries, and how the trust assets will be managed and distributed. It is crucial to have the trust deed drafted by a qualified legal professional to ensure it complies with all legislative and statutory requirements and is tailored to your specific needs.
Before establishing the trust, the settlor (the person creating the trust) must contribute a nominal amount (e.g., $10) to formally bring the trust into existence. Once the trust is signed, the trustee(s) hold a meeting to formally agree on their appointment and the terms outlined in the trust deed. After this, the trust becomes operational and can open a bank account to accept contributions or make investments, subject to the terms outlined in the trust deed.
In addition to the trust deed, there are other legal requirements to consider when setting up a family trust in Australia. The trust will need to apply for an Australian Business Number (ABN) and a Tax File Number (TFN) to operate as a legal entity and meet its tax obligations. Depending on the type of trust and complexity, you may also need to register it as a company. The trustee must have an Australian address and be accessible to the legal jurisdiction under which the trust operates.
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Tax implications
Family trusts are commonly used in Australia to protect assets and facilitate tax planning for family members. While a trust can be a powerful tool for managing taxes effectively, it is important to be aware of the potential tax implications and risks.
Firstly, it is essential to understand that a trust is not a separate legal entity like a person or company, but it must be registered in the tax system. The trustee, who is the legal owner of the assets in the trust, is responsible for fulfilling the trust's tax obligations, such as lodging an annual tax return. Trustees must ensure compliance with the trust deed and adhere to tax regulations, including distributing income correctly to maintain the trust's legal standing and tax benefits.
One of the key tax implications of a family trust is the ability to stream income in a tax-effective way. Trustees have the discretion to distribute income and capital as they see fit, allowing them to minimise tax liabilities on a year-to-year basis. However, if the income is not fully distributed, the trustee may be liable to pay tax on the undistributed income at a higher rate. Additionally, in certain circumstances, such as when beneficiaries are minors or individuals with disabilities, the trustee may be required to pay tax on their behalf.
Another tax consideration for family trusts in Australia is the potential for tax avoidance concerns. The Australian Taxation Office (ATO) has associated trusts with tax avoidance, particularly among the wealthy. As a result, the ATO has established a special Trusts Taskforce to address non-compliance issues, such as undisclosed distributions and offshore dealings through tax havens. Therefore, it is crucial for trustees to maintain proper tax compliance, including financial reporting and ensuring distributions align with the trust deed.
Furthermore, family trusts may have access to certain tax benefits, such as franking credits and trust loss rules. However, to access these benefits, a family trust election must be lodged with the ATO, which places restrictions on distributions to maintain compliance. Additionally, family trusts can access the 50% capital gains tax concession, making it an attractive investment structure for passing down wealth to the next generation.
Lastly, it is important to consider the costs associated with establishing and maintaining a family trust. The setup costs can vary depending on the complexity of assets and financial goals, but legal documentation typically ranges from $1,500 to $2,500 plus GST. Ongoing costs for tax compliance, including financial reporting and tax filings, should also be considered, with costs starting at $1,500 plus GST for simple holding trusts and increasing with complexity.
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Frequently asked questions
A family trust is a legal relationship where one party, the trustee, holds property or assets for the benefit of another party, the beneficiary. It is a way to structure your finances and protect the ownership of your assets while you are alive.
There are several types of family trusts in Australia, each with its own advantages and disadvantages. The most common is a discretionary trust, which allows trustees to decide how to distribute income and capital to beneficiaries. Other types include unit trusts, hybrid trusts, testamentary trusts, and special disability trusts.
Setting up a family trust requires careful planning and an understanding of how trusts operate. First, you must decide on the type of trust that best suits your financial goals. Then, you can create a trust deed, which is a legal document outlining the rules and terms of the trust. It is important to have this drafted by a qualified legal professional. Once the trust deed is signed, the trustee(s) hold a meeting to formally agree on their appointment. The next step is to apply for an Australian Business Number (ABN) and a Tax File Number (TFN). Finally, open a bank account for the trust in the trustee's name.
The cost of setting up a family trust can vary depending on the complexity of your assets and financial goals. It typically costs $1,500 (plus GST) in legal documentation, or $2,500 (plus GST) for a trust with a corporate trustee. There may also be stamp duty fees, which differ from state to state in Australia.
