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Family Trusts – Questions & Answers

Q: What exactly is a Family Trust and what types of trust exist?

A: The word “trust” is a technical legal term. However it just means that there is a relationship of trust and confidence under which property is held by one party who is called the “trustee.” The trustee holds property on behalf of other parties who are entitled to the benefits of the property. Those parties who are entitled to the benefit of the trust are called beneficiaries.

The term “family trust” is a purely descriptive one; it is not a legal term. The beneficiaries of such a trust would be the main members of the family of the person instigating the arrangement.

Q: What is a trust deed, a settlor and the trustee?

Trust deed
The terms and conditions under which a family trust is established and maintained are set out in its deed.

The trust is established by the trust’s settlor and trustee (or trustees) signing the trust deed, and the settlor giving the trust property (the “settled sum”) to the trustee.

The settlor
The settlor’s function is to give the assets to the trustee to hold for the benefit of the trust’s beneficiaries on the terms and conditions set out in the trust deed. The settlor executes the trust deed and then, generally, has no further involvement in the trust.

The trustee
The trustee is responsible for the trust and its assets. The trustee has broad powers to conduct the trust, and manage its assets.

In a family trust, the trustees are usually Mum and Dad (or a company of which Mum and Dad are the shareholders and directors). Their children and any other dependants are usually listed as beneficiaries.

Q: What are the benefits of a Family Trust?

A: The benefits can include things such as:

  • Can assist in protecting the family group’s assets from the liabilities of one or more of the family members (for instances, in the event of a family member’s bankruptcy or insolvency);
  • Making provisions for the family, including in particular very young children and adult children with a disability.
  • Attaching certain conditions to gifts.
  • Provide a mechanism to pass family assets to future generations.
  • Giving children the benefits of family wealth without losing control over key assets.
  • Creating a legal framework for the family assets which will last for a long time.
  • Protecting these assets against accrual and potential creditors.
  • Passing wealth from generation to generation.
  • The creation of a tax effective structure.
  • To safeguard certain social security entitlements.

Q: What are the disadvantages of a Family Trust?

A: The disadvantage is mainly the cost associated with establishing the trust and any ongoing fees as well as additional legal costs if disputes ever arise.

Potential lenders may impose extra charges to cover the expenses involved in vetting trust deeds and the like.

There will also be further costs when the trust is eventually wound up.

If a company structure is to be used as trustee then there will be additional costs for setting up or acquiring a company, for maintaining statutory records and for various filing fees.

Q: How does a Family Trust work?

A: Much the same as a deceased estate, except that it is set up while the instigator is still alive. Typically family trusts invest in shares, property and fixed interest securities in the same way as individuals. Some family trusts are used to run a small business.

Q: Should everyone have a family trust?

A: No. Sometimes such trusts are recommended to persons with negligible assets and income and no dependants, mainly so that those making the recommendations can collect fees.

Q: What are the costs of establishing and maintaining a family trust?

A: In simple cases a few hundred dollars in legal fees and stamp duty would be incurred when establishing the trust. Annual costs could involve the preparation of tax returns and minor outlays such as on correspondence.

Q: What is the best time to set up a family trust?

A: The best answer, having regard to both clerical and tax implications, is probably “as soon as possible”.

In respect of existing family assets acting earlier rather than later means that:

Future earnings on those assets could be subject to lower tax.

Future capital gains tax on those assets could also be incurred at a lower tax rate.

Stamp duty and capital gains tax in respect of the assets being transferred into the family trust at its commencement are likely to be less than later on when these assets might have considerably increased in value.

In practice the smaller number of individual holdings likely to be involved in such an early transfer would also be an administrative advantage.

Q: What are the current taxation implications for Family Trust operators?

A: If the trust is a discretionary trust then the tax consequences can be one of the factors taken into account when deciding which distributions should flow to which beneficiaries each year.

Clearly, the greatest collective tax minimisation occurs, quite legally, when distributions are made to beneficiaries on low or zero marginal tax rates. The ability to use the low income taxpayers’ rebate may constitute an additional advantage.

In some cases the trustee’s ability to make distributions within the tax-free threshold to one or more low income beneficiaries can lead to significant overall tax savings.

The more persons in such a position that are available to receive trust distributions the greater the total tax savings would be – although, of course, there may be non-tax features to such a scenario which make it unattractive.

No tax savings at all will occur when all the beneficiaries are already in the highest marginal tax bracket.

In fact, there can even be negative tax savings from using a trust structure in some cases – for example, where a child beneficiary is involved and a 66 per cent marginal tax rate applies or when losses in one entity cannot be offset against gains in another.

Any income in a financial year which is not distributed to beneficiaries is technically referred to in the Income Tax Assessment Act 1936 as income to which no beneficiary is presently entitled.

Such income is generally subject to a penal rate of tax under section 99A of the Act. This rate, being the maximum personal rate of tax in the system including the Medicare levy, is applied to the entire income, regardless of its size.

Our dedicated team can assist you with any queries or concerns you may have about your Will or a Estate Planning matter. Complete and submit the express enquiry form or call us on +61 2 9223 9166 to arrange an appointment.

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