Family Trust

The settlor is the person entrusted with the task of signing the trust deed and granting the authority to the trustee to manage the trust. The settlor essentially initiates the trust by establishing it through this legal document.

Beneficiaries are the individuals appointed during the family trust election to receive benefits from the assets and wealth held within the family trust. These beneficiaries are the intended recipients of the trust’s income, assets, or distributions.

The appointor is an individual vested with the authority to make critical decisions regarding the trust’s administration. This includes the power to remove and nominate new trustees in situations where the original trustee is no longer able to fulfill their duties in accordance with the trust deed.

The appointor plays a pivotal role in ensuring the trust’s continued effective management.

Thus, an Australian family trust involves several key parties, each with specific roles and responsibilities.

In a discretionary trust, beneficiaries do not have an automatic or guaranteed right to the property and assets held within the trust. Instead, they hold the expectation of potential distributions, which are at the discretion of the trustee.

The defining feature of discretionary trusts is the broad discretion granted to the trustee in determining how much, if any, of the trust’s income or assets should be distributed to the beneficiaries.

Unlike some other trust structures, beneficiaries in a family trust do not have predetermined entitlements. The trustee can make decisions based on the trust’s objectives and the financial needs of the beneficiaries.

Discretionary trusts can include minors as beneficiaries, allowing them to potentially benefit from trust distributions. However, it’s important to note that distributions to minors may be subject to higher taxation rates, potentially up to 66%.

So, discretionary trusts, such as family trusts, are defined by their flexibility and the discretionary powers vested in the trustee. This discretionary nature distinguishes family trusts from other trust structures, making them a valuable tool for managing wealth and assets within a family context.

Family trusts can be employed to shield certain assets from potential claims and creditors. This is particularly useful in protecting assets like the family home from risks associated with business ventures that might fail.

Opting for a family trust structure provides opportunities for trustees and beneficiaries to arrange their tax affairs in a way that minimizes their tax liability through compliance with the tax laws.

Trustees have the authority to determine how income and capital owned by the trust are distributed. This can be advantageous for individuals in higher tax brackets, as income can be directed to beneficiaries in lower tax brackets.

For instance, rental income from a trust owned investment property may be allocated to trust members with lower incomes. This principle also applies to the taxation of dividend payments from trust owned shares.

Family trusts may be established for a range of other purposes:

• Preventing challenges to a family member’s will by consolidating family assets within the trust structure.
• Managing family assets or conducting a family business efficiently.
• Facilitating the management of a family business, often structured as a trust, to include various family members as beneficiaries while ensuring they don’t have direct involvement in the business operations.
• Allowing parents to precisely distribute wealth to their children, especially for the tax efficient transfer of asset ownership from one generation to the next. This can make a significant difference in preserving family businesses.
• Leveraging a family trust as an effective tax structure to distribute income to beneficiaries with lower marginal tax rates.

Thus, family trusts offer a versatile tool for managing assets, protecting them from various risks, and optimizing tax outcomes. The establishment of such trusts is motivated by a combination of asset protection, tax planning, and the unique needs and goals of individual families.

When your family business is in a phase of expansion and growth, a family trust can offer advantages in terms of structuring and protecting assets as well as optimizing tax outcomes. It can adapt to the evolving needs of a growing enterprise.

If your average tax rate as a business owner is approaching the 30% mark, a family trust can be a tax effective solution. It allows for income distribution among family members, potentially reducing the overall tax liability for the family unit.

The following step involves the selection of beneficiaries for the family trust. Beneficiaries are the individuals or entities designated to receive benefits from the trust, thereby holding beneficial ownership of the trust’s assets.

Notable considerations regarding beneficiaries include their entitlement to be considered when the trustee makes decisions regarding trust fund distributions and their rights to trust income or other trust property.

The specifics of beneficiaries’ entitlement are typically outlined in the trust deed, covering aspects such as the nature of entitlement (e.g., fixed amount, percentage, or trustee’s discretion) and the eligible class of beneficiaries (e.g., family members, corporate entities, foreign individuals, or charitable purposes).

The third critical step involves the creation of a legally binding family (discretionary) trust deed, serving as the foundational legal document that activates the family trust. This trust deed defines crucial aspects and provisions relating to the family trust, including:

• The formal establishment of the trust.
• The identification of the relevant beneficiaries.
• Guidelines governing the distribution of income and capital to beneficiaries.
• Protocols for the potential termination of the family trust.
• The appointment of the trustee, outlining their powers and remuneration.
• Mechanisms for the removal and appointment of future trustees.
• Responsibilities regarding the maintenance of financial records.
• Relevant indemnity clauses designed to safeguard the interests of all parties involved.

Each of these steps plays an integral role in establishing a family trust, ensuring compliance with legal requirements and facilitating the effective pursuit of its intended purposes.

The fourth step involves settling the family trust, a crucial legal process for formalizing the trust’s establishment. To accomplish this, a settlor is designated to sign the trust deed and provide the trustee with a nominal fee.

The settlor’s role involves creating the trust deed for the benefit of the beneficiaries and contributing a small initial sum, typically around $10, to the trustee. It is customary for the settlor to have no direct involvement in the trust after the settlement. Importantly, the settlor should not also be a beneficiary of the trust for tax purposes.

In the next step, the trust deed is formally executed. The process includes:

• The trust deed being signed by the settlor.
• Subsequently, the trustee(s) convene a meeting to collectively accept and be bound by the terms and conditions outlined in the trust deed.
• It is advisable to conduct this step in a formal setting, such as an in person meeting, to ensure the presence of all relevant parties and witness the signing of the deed. Alternatively, this can be achieved electronically through an audiovisual link, in accordance with updated legislation.

Following the establishment and signing of the family trust, it may be necessary to formally stamp the family trust deed. Stamp duty rates vary by state or territory, and the application processes differ accordingly.

The costs associated with stamping a discretionary trust are as follows, particularly for trusts involving non land assets:

• New South Wales (NSW): Stamping requires approval by a registered OSR lodger, with a cost of $500 and an additional charge of $10 per stamped copy. Stamp duty must be paid within three months from the execution date.
• Victoria (VIC): Stamping necessitates approval from a registered Duties Online Agent, incurring a cost of $200 with no additional charges for extra copies. Stamp duty should be paid within three months from the execution date.
• Australian Capital Territory (ACT): Stamp duty is not applicable, and there is no time limit imposed for stamping.
• Queensland (QLD): Stamp duty is not applicable, and no specific time limit is imposed for stamping.
• South Australia (SA): Stamp duty is not applicable, but deeds may still be stamped as “exempt,” and no time limit is imposed for stamping.
• Western Australia (WA): Stamp duty is not applicable, and there is no time limit imposed for stamping.
• Northern Territory (NT): Commission of Taxes handles stamping, costing $20 with an additional $5 per extra copy. Payment can be made via cheque, cash, or EFTPOS.
• Tasmania (TAS): SRO Tasmania oversees stamping, with a cost of $50 and no additional charges for extra copies.

Upon the establishment of the trust, it is necessary to apply for an Australian Business Number (ABN) and a Tax File Number (TFN) for the trust. This ensures compliance with tax regulations and legal requirements.

The final step in the process involves the opening of a dedicated bank account for the family trust. The account should be registered in the name of the trustee “as a trustee for the trust.”

The initial deposit into this account should be the settlement sum, which must be in place before any additional deposits or transactions occur.

Completing these steps ensures the proper establishment, legal compliance, and operational readiness of a family trust, facilitating its effective management and pursuit of its intended objectives.

Complexity and Costs
Establishing and managing a family trust can be intricate and costly. It involves ongoing administrative work related to taxes and accounting, as well as legal expenses.

Professional assistance from lawyers and accountants is often required, adding to the overall financial burden. It’s essential to assess these expenses against potential benefits before committing to a family trust.

Loss of Control
When assets are transferred to a family trust, control shifts from the individual to the chosen trustees responsible for managing the trust.

Even if the individual serves as the trustee, they may need to relinquish some degree of control over the assets. This loss of direct control can be a drawback for individuals who prefer maintaining complete authority over their assets.

Irrevocability
Family trusts are typically challenging to revoke or unwind once assets are placed within them. Creating a family trust should be a well considered decision, as it may have enduring consequences.

It’s crucial to fully grasp the implications and seek professional guidance before making such a choice.

Limited Personal Use
Assets held within a family trust are typically intended to benefit multiple family members or specific beneficiaries. This structure can restrict access to assets or limit their utilization for purposes beyond what the trust specifies.

Advance planning is essential, and individuals should consider whether the trust’s limitations align with their financial objectives.

Not Suitable for Running Businesses
Family trusts are generally not suitable for running businesses due to various limitations.

Business profits must be distributed to beneficiaries, preventing the business from retaining profits.

Additionally, there’s the risk of personal liability for trust related business debts unless a company is nominated as the trustee. Ambiguities in the trust deed can lead to legal disputes, and creditors can seize trust assets to pay off individual debts during one’s lifetime.

By carefully considering these disadvantages and seeking professional advice, individuals can make informed decisions about whether a family trust is suitable for their specific financial circumstances and long term goals.

While a family trust permits income distribution to family members, losses incurred within the trust remain trapped and require funding with after tax income.

This structure doesn’t allow losses to flow down to offset PAYG income.

For example, if the trust holds a negatively geared property, the losses accumulate within the trust, providing no immediate tax benefits. With expert advice, adjustments can be made to enable these losses to offset PAYG tax, improving cash flow.

Family trusts are valuable for asset protection. However, when an individual serves as the trustee, it can compromise this protection.

In case of legal action against the trust, the trustee’s personal assets are at risk. Proper trust amendments can address this issue, but if not executed correctly, it may trigger stamp duty implications.