What Is a Family Trust and How Can It Benefit You?

You have worked hard to build your wealth, and you’re probably thinking about how to protect your assets and make sure they benefit your current and future family members. A family trust is one of the solutions you should consider. It’s a tax-efficient way to protect your assets, distribute income to family members, and plan your estate.

At Lifestyle Led Wealth, we’ve helped our clients figure out whether a trust is right for them and how to integrate it into their financial planning. We’ve put together this guide to help you decide whether it’s something you might consider, including the benefits and limitations, and how to set one up.   

What is a Family Trust and How Does It Work?

A family trust, also called a discretionary trust, is a legal structure that holds and manages family assets and distributes them to beneficiaries. Instead of owning assets in your name, they are held in a trust, where they are more secure from creditors, family disputes, divorce, and other legal claims.

A family trust can hold a wide range of assets, including real estate, business assets, investments such as stocks and bonds, and personal assets like an art collection.

One of the most important positions in a family trust is that of the trustee. A trustee acts as the legal owner of the assets and has the discretion to distribute capital and income to beneficiaries in accordance with the trust deed. The trustee can be an individual or a company (corporate trustee).

Beneficiaries are typically family members, though other people can be included as well. They can also include future generations, making family trusts a good tool for intergenerational wealth transfer, estate planning, and wealth preservation. 

Benefits of a Family Trust

Here are the main advantages of family trusts:

1. Flexibility

A family trust gives you a lot of flexibility over how you distribute your income and capital to beneficiaries like your spouse, children, grandchildren, and other family members.

The trustee chooses when and how they distribute income to beneficiaries, and they can change the distribution from year to year to maximise tax benefits or adjust to changing family needs (e.g. a new baby).  

This type of trust is useful if you run a business and want an easy way to distribute income to family members. You can even pay yourself from the trust.   

2. Asset Protection

Having your hard-earned assets in your personal name leaves them exposed to creditors, legal claims, and other risks.

Putting your assets in a family trust provides more protection. Since you’re not the legal owner, creditors cannot go after these assets. They are also more insulated against bankruptcy proceedings, divorce settlements, and family disputes.     

3. Lower Tax

The biggest tax benefit of a family trust comes from its flexibility in distributing income. Instead of one or two people earning a high income that’s taxed at a high rate, the trustee can split the income and distribute it to lower-earning family members.

Everyone gets taxed at a lower marginal rate, leading to less tax overall. With good planning, you can save thousands of dollars in tax every year.  

4. Estate Planning

A family trust continues after death, so you can use it as part of your estate planning to benefit your children, grandchildren, and future family members. It also ensures your wealth is used the way you intended.  

Because a family trust is not part of your estate (since you do not own the assets), it avoids probate delays and disputes. Unlike a will, beneficiaries can keep earning an income regardless of the probate process.

Downsides of a Family Trust

A family trust has several limitations and challenges you should consider before you start one.

• A family trust has significant setup and ongoing costs for legal documentation, professional advice, tax returns, and ASIC fees if you opt for a corporate trustee.
• Managing a family trust involves a lot of legal complexities. Usually, you need to pay a professional for ongoing advice.
• You have to distribute all income each year to avoid high taxes. Any undistributed income is taxed at the highest rate.
• When distributing income to minors (under 18 years), you can only distribute $416 before significant tax penalties kick in. If you want to give higher income to minors without the high tax rate, consider a testamentary trust instead, though that comes into effect only after you pass on.   

Creating a Family Trust

Creating a family trust starts by selecting trustees and appointors. You then get a solicitor to draft a trust deed, which is the document that will govern the actions and decisions of the trustee.

A settlor (the person setting up the trust) signs the deed and provides the initial sum to start the trust. You also need to apply for a TFN and ABN, appoint beneficiaries, and set up a trust bank account.

At this point, you can now start transferring assets to the trust, though keep in mind this can trigger capital gains tax and stamp duty.

Is a Family Trust Right for Me?

Because of the costs and complexity involved in starting and running a family trust, it’s not worth it to everyone. A family trust is most beneficial to:

• High-income earners and professionals. You can enjoy significant tax savings by distributing your income to family members in lower tax brackets.
• Business owners looking for a way to distribute business profits among family members, protect business and personal assets, and reduce tax.
• High-net-worth individuals with long-term wealth planning goals, including multi-generational estate planning.

How Lifestyle Led Wealth Can Help

Family trusts can feel overwhelming, but they don’t have to be. Our trust advisor, Justin, can walk you through the entire process, from figuring out whether it’s the right option for you. Contact Justin today at 1300 068 453.

Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.