Family trusts are an increasingly popular way for Australian families to manage their assets, provide for future generations, and achieve financial goals. Setting up a family trust can offer numerous benefits, including asset protection, tax planning, and estate planning advantages. This comprehensive guide will walk you through everything you need to know about setting up a family trust in Australia.
What is a Family Trust?
A family trust, also known as a discretionary trust, is a legal arrangement where a legal owner, the trustee, holds and manages assets for the benefit of family members or other beneficiaries. The trustee has the discretion to decide how the trust’s income and assets are distributed among the beneficiaries, which can provide flexibility in managing family finances.
Benefits of Setting Up a Family Trust
Here are the benefits of setting up a family trust (as a separate legal entity):
1. Asset Protection Benefits
One of the primary reasons families establish trusts is to protect assets from creditors, legal disputes, or business risks. By holding trust assets, they are generally protected from personal liabilities of the beneficiaries.
2. Tax Planning
Family trusts can provide significant tax advantages. Income generated by the trust can be distributed to beneficiaries in lower tax brackets, potentially reducing the overall tax burden. Additionally, trusts can be used to access capital gains tax (CGT) discounts.
3. Estate Planning
Family trusts facilitate the smooth transfer of wealth from one generation to the next. By setting up a trust, you can ensure that your assets are managed and distributed according to your wishes, even after your death.
4. Flexibility and Control
The discretionary nature of family trusts means that trustees have significant control over how and when distributions are made, allowing for more tailored financial planning to meet the changing needs of beneficiaries.
Steps to Set Up a Family Trust in Australia
1. Choose a Trustee
The trustee is responsible for managing the trust and making decisions about how its assets are used. Trustees can be individuals, a trustee company, or a combination of both. It’s crucial to select a trustworthy and capable person or entity to act as trustee.
2. Draft the Trust Deed
The family trust deed is the legal document that establishes the trust and outlines its terms and conditions. This document should specify:
- The name of the trust
- The corporate trustee(s)
- The beneficiaries
- The powers and duties of the trustee
- The rules for distributing income and capital
It’s advisable to engage a legal professional to draft the discretionary trust deed to ensure it complies with Australian law and meets your specific requirements.
3. Settle the Trust
A trust is settled when the settlor (the person creating the trust) transfers a nominal amount (often called the initial settlement sum) to the trustee as trust property. The settlor must be someone other than a beneficiary or trustee to avoid conflicts of interest.
4. Apply for a Tax File Number (TFN) and Australian Business Number (ABN)
A family trust must have its own TFN and ABN to lodge tax returns and conduct a family business. You can apply for these numbers through the Australian Taxation Office (ATO) or online.
5. Open a Trust Bank Account
The trust will need a separate bank account to manage its finances. This account should be in the name of the trust and used exclusively for trust-related transactions.
6. Register for GST (if applicable)
If the trust’s annual turnover is expected to exceed $75,000, it must be registered for Goods and Services Tax (GST). Registration can be completed online through the ATO.
7. Maintain Proper Records
Trustees are required to keep accurate and up-to-date records of all trust transactions, including income, expenses, distributions, and meetings. Proper record-keeping is essential for compliance and effective trust management.
It’s important to note that you may have to pay stamp duty fee for establishing the trust deed, which can vary depending on the state or territory.
Managing a Family Trust
Income and Capital Distribution
The trustee has the discretion to decide how and when to distribute the trust property income and capital to the primary beneficiaries. These decisions should align with the terms of the trust deed and be made in the best interests of the beneficiaries.
Annual Tax Return
The trust must lodge an annual tax return with the ATO, reporting its income, deductions, and distributions to beneficiaries. Relevant beneficiaries must include their share of trust income in their personal tax returns.
Compliance with Legal Obligations
Trustees must comply with all legal and regulatory obligations, including those set out in the trust deed and relevant Australian laws. Failure to do so can result in penalties and legal issues.
Regular Review and Adjustment
It’s important to regularly review the trust’s performance and management to ensure it continues to meet the family’s financial goals and complies with any changes in the law. Trustees should hold regular meetings to discuss and document decisions regarding the trust.
Conclusion
Setting up a family trust in Australia can provide numerous benefits, from asset protection and tax planning to estate planning and financial flexibility. However, establishing and managing a trust requires careful planning, legal compliance, and ongoing administration. By following this guide and seeking professional advice, you can create a family trust that helps secure your family’s financial future.
For expert assistance in setting up a family trust tailored to your specific needs, contact Grey Space Advisory. Our team of experienced professionals is here to guide you through the process and ensure your trust is established and managed effectively.
Frequently Asked Questions
What is trust in family business?
In a family business context, a trust is a legal entity established to manage and protect the family’s assets and business interests. A family trust holds property or assets for the benefit of each family member, known as beneficiary.
The trustee, who is responsible for managing the trust, has a fiduciary duty to act in the best interests of the family group, making decisions about asset distribution and management. This structure can provide benefits such as asset protection, tax planning, and smoother succession planning, ensuring that the family business and its wealth are preserved and effectively passed down through generations.
Who are the beneficiaries of a family trust?
The beneficiaries of a family trust are the individuals or entities for whom the trust is established and who are entitled to benefit from the trust’s assets and income. Typically, these beneficiaries are family members, such as the settlor’s children, grandchildren, and sometimes even extended family members.
The family trust deeds specify who the beneficiaries are and how the trust’s income and capital are to be distributed among them. Beneficiaries can also include other entities, such as companies or charities, depending on the terms set out in the trust deed.
Do family trusts pay capital gains?
Yes, family trusts can incur capital gains and are subject to capital gains tax (CGT) when they sell or transfer assets that have appreciated in value. However, trusts in Australia may be eligible for the 50% CGT discount if the asset has been held for more than 12 months, similar to individual taxpayers.
The capital gain, after applying any discounts or concessions, is typically distributed to the beneficiaries, who then include it in their personal tax returns and pay any CGT due at their marginal tax rates. This can provide tax planning opportunities by distributing gains to beneficiaries in lower tax brackets.
