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Family trusts explained

Published 13 March 2023

Family trusts explained

A family trust is an excellent way to protect generational wealth, assets, and the financial future of your descendants.

A family trust is a discretionary arrangement in which a trustee is the holder of certain assets and the distributor of the income generated by those assets for the benefit of beneficiaries, and can be a very valuable tool in estate planning matters. When establishing a family trust, trustees are appointed who control the trust assets. In most cases trustees are parents, and the beneficiaries may be, for example, themselves, their children and grandchildren. Registered charities may also be beneficiaries.

The three main advantages for establishing a family trust are to protect assets, to protect vulnerable members of the family and for tax purposes.

Beneficiaries named in the Trust Deed are not the asset owners. The trustee is the legal owner of trust assets and operates the trust according to the Trust Deed. Therefore, given the beneficiaries do not own the assets (unless they are also the trustee), they are unable to liquidate them, which protects the assets in the event of a business failure, bankruptcy, litigation or divorce. Trusts can also be valuable with estate planning by providing ongoing financial support to beneficiaries, and ensuring asset arrangements can stay in place for the benefit of those beneficiaries, or lineal descendants, without having to change ownership details.

Trusts can provide flexibility in managing an investment or real estate portfolio. For example, if the trustee of a trust owns a rental property, the rental arrangement can continue after the death of a beneficiary. Rent can be distributed to the existing beneficiaries and there is no need to change the ownership of the house and incur those associated costs, such as Stamp Duty.

You may also wish to purchase a home for your child to live in but with the ownership of that property falling under the assets of the trust.

Similarly, dividends paid by a company to a trust due to a share portfolio would continue to receive dividends after the death of one of the trustees, as other trustees can continue to pay those dividends as distributions to the remaining beneficiaries.

This flexibility is an advantage when planning both your retirement and your legacy, and trust structures offer opportunities to supplement your other superannuation arrangements.

Trust net income is usually distributed annually to beneficiaries who then add that specific amount to their income and pay tax accordingly. Trust income may be distributed across multiple beneficiaries who then each pay tax at their personal tax rate. Distributions can be made in any proportion as determined by the trustee. Any undistributed income earned by the trust is taxed at the top marginal rate, currently 47%, and distributions exceeding $4161 to minor children are taxed at a higher rate*. Capital gains tax is also reduced by 50% on the sale of profitable assets.

The ATO made changes to the way family trust income can be distributed in early 2022 and may make further changes. Further, there may be capital gains tax payable if trust assets are sold. A financial adviser can look at your personal situation and help determine if a family trust is appropriate for you and can also provide ongoing advice on compliance matters and effective tax strategies.

Please seek professional advice regarding the tax implications of a family trust.

There are costs in establishing a family trust and ongoing expenses, such as the preparation of the Trust Deed, which outlines qualifying beneficiaries, and annual financial reports and trust tax returns. In the right circumstances these costs are offset by the tax savings and by the peace of mind it can provide in terms of securing those assets.

For more information on estate planning, book a consultation with Fiducian Financial Services.