How to Set Up a Family Trust in Australia

Australian trust funds are a tax-effective structure used by individuals to protect personal, family, and business assets.

However, the process of setting up a trust fund in Australia is complex and involves legal structures, regulations, and tax considerations.

This article provides a guide on setting up a family trust in Australia and empowers you to make informed decisions that align with your long-term financial goals.

Understanding Family Trusts

A family trust is a type of discretionary trust commonly set up to manage a family’s assets, including the family business. It provides tax advantages and asset protection benefits while allowing for flexible distributions among family members.

A family trust differs from other trusts by its focus on managing family assets through discretionary distributions tailored to benefit family members specifically.

A family trust involves three main parties – the settlor who transfers assets to a trustee, the trustee who manages the trust assets for the beneficiaries (usually family members), and the beneficiaries who benefit from the trust.

Benefits of Establishing a Family Trust

Family trust advantages include asset protection, tax efficiency, estate planning, and protecting vulnerable family members.

Asset Protection

Family trusts generally separate personal assets from inheritances, protecting them from estate contestation, creditors, and bankruptcy.

A family trust can serve as a secure vault where a parent can store valuable items for their children. The vault ensures the safekeeping and separation of items in case of financial difficulties or divorce for one child.

Tax-Efficient Income Distribution

A family trust can save on taxes by distributing income to family members, potentially reducing the overall tax burden.

For instance, if a trust earns $50,000 and distributes $10,000 to five beneficiaries in lower tax brackets, it can reduce the overall tax burden.

Additionally, family trusts offer a 50% capital gains tax discount on profits from asset sales held for over 12 months.

Estate Planning and Wealth Transfer

Family trusts allow for a smooth transfer of inheritance to children after a parent’s death, avoiding probate and lengthy legal procedures.

For example, if you have a family trust set up and wish to transfer control to your children or grandchildren, you can do so by changing the trustee without incurring tax implications.

This allows for efficient multi-generational wealth transfer while maintaining control over asset distribution among beneficiaries.

Support for Beneficiaries with Special Needs

A Family Trust can establish a Special Disability Trust (SDT) to support beneficiaries with special needs, ensuring their needs are met even after parents can no longer provide direct care.

The trust can maintain assets up to $500,000, indexed annually to the Consumer Price Index (CPI), without impacting the child’s social security benefits eligibility.

Other trusts, such as Testamentary Protective Trusts, can also be used to safeguard special needs beneficiaries’ interests.

Who Needs a Family Trust?

A family trust offers significant benefits to business owners, high-risk professionals, high-net-worth individuals, and retirees with high taxable incomes.

 

Business Owners

A family trust can be instrumental for small business owners in protecting assets and facilitating the seamless transfer of wealth.

A family trust provides secure protection for significant investment assets connected to your business, as they are not held in your personal name.

Additionally, a trust allows business owners to specify asset distribution instructions if they were to pass away, facilitating a smooth wealth transition without lengthy probate processes.

High-Risk Professions

Australians in high-risk professions, like doctors, can protect their personal wealth from professional liability claims by establishing a family trust and purchasing assets through it. This is because assets held in a trust are generally protected from legal claims and creditors.

High Net Worth Individuals 

High Net Worth Individuals can protect their assets through trust-owned assets, which are generally protected against creditors and can be transferred without probate, enabling estate planning and wealth preservation for future generations.

Retirees with High Taxable Income 

Family trusts allow for income splitting among family members, enabling trustees to distribute income to family members in lower tax brackets. This strategy can be particularly advantageous for retirees looking to lower their tax liabilities and manage their wealth efficiently.

Setting Up a Family Trust: A Step-by-Step Guide

Let’s now go through each step of the process and help you create a family trust that provides legal and financial security for your loved ones.

1. Choosing a Professional Team 

You’ll need a solicitor who specialises in trusts, a financial adviser, and a tax accountant.

A trust lawyer is crucial in drafting family trust deeds. They assist in setting up the trust structure, outline the terms and conditions, and ensure legal documentation and compliance.

A tax accountant and financial adviser offers valuable insights, helps structure distributions, and ensures tax compliance, maximising trust benefits while ensuring tax minimisation.

2. Drafting the Trust Deed 

A family trust deed is a fundamental legal agreement that outlines the conditions for the establishment and management of a trust. Here are the key clauses of a family trust deed:

• Terms and Objectives: Clearly define the purpose and goals of the trust.

• Powers and Responsibilities of the Trustee: Outline the authority and duties of the trustee.

• Types of Assets: Specify the assets that the trust can purchase and own.

• Beneficiaries: Name the beneficiaries and detail their entitlements to income and capital from the trust property.

3. Appointing Trustees 

When choosing trustees for an Australian family trust, it is crucial to consider specific criteria to ensure effective governance and compliance with legal requirements.

Trustees should be eligible individuals or companies (corporate trustees) with integrity, trustworthiness, financial acumen, and a commitment to legal compliance. Avoiding conflicts of interest is also essential.

Once appointed, trustees have significant responsibilities, including acting in good faith, fulfilling fiduciary duties, managing trust assets, ensuring compliance with laws and regulations, making informed decisions, and maintaining accurate records.

4. Settling the Trust: 

The settlor is responsible for creating a trust by providing an initial settlement sum, usually $10. They name beneficiaries, trustees, and appointors, but are advised not to be beneficiaries due to tax reasons. The settlor has no further involvement once the trust is established.

Process of Establishing an Australian Family Trust:

1. Choosing the Settlor: The settlor, who is not related to the beneficiaries, must be over 18 and willing to sign the trust deed.
2. Providing the Settled Sum: To start the trust, the settlor gives the trustee the settled sum – a genuine gift and not reimbursable.
3. Creating the Trust: After the settlor provides the settled sum, the trustee holds the trust property and issues a receipt, marking the official creation of the trust.
4. Documenting the Settled Sum: Depositing the settled sum into a trust bank account and providing a signed receipt is crucial for trust establishment.

5. Registering the Trust: 

To register a trust with the Australian Taxation Office (ATO) and obtain an Australian Business Number (ABN) and Tax File Number (TFN), follow these steps and provide all necessary information accurately:

1. Trust Registration: Family trusts must have their own TFN for income tax filing and an ABN for enterprise-related trusts, registered by the trustee in their capacity.
2. Trust Tax Returns: A trustee must file a trust income tax return, regardless of the net income amount. Beneficiaries must include their share in their tax returns.
3. Specific Rules for Trusts: The trustee is responsible for managing the trust’s tax affairs, including registration and reporting, with different rules applicable to closely held trusts, non-resident beneficiaries, and trusts operating businesses.
4. Completing Trust Information: The trust’s TFN and ABN should be printed on the tax return, ensuring consistency in the trust name unless there’s a legal name change.
5. Additional Information: Attach any required documents to the tax return as instructed. Provide accurate details about the trust, trustee, and contact information.

Tax Implications and Considerations

Establishing a family trust requires careful tax considerations, record-keeping, and compliance with laws. Trustees must maintain accurate records, review deeds, and ensure beneficiary protection.

Not a Tax Avoidance Tool 

Family trusts are a valuable tax planning tool, offering tax concessions when a trustee makes a valid Family Trust Election (FTE). However, they are not tax avoidance methods, as they are scrutinised by the Australian Taxation Office (ATO).

Trust vs. Individual Tax Rates

Discretionary family trusts offer significant tax benefits by distributing funds at each beneficiary’s tax rate, resulting in significant savings compared to paying taxes in one person’s name.

Record-Keeping

Trustees of a family trust are responsible for maintaining accurate financial records to protect beneficiaries’ interests and avoid legal issues. This includes property transfers, investments, income, expenses, distributions, and trust assets.

The Crucial Role of Financial Adviser in Family Trust

A financial adviser is crucial for effectively utilising a family trust, due to their ability to connect it to broader financial plans, including superannuation and tax strategies. Here’s why a financial adviser is indispensable:

• Comprehensive Financial Planning: Financial advisers can integrate a family trust into overall strategies for retirement planning, ensuring alignment with long-term goals and objectives.
• Tax Efficiency: By leveraging the expertise of a financial adviser, families can optimise tax strategies within the family trust, potentially minimising income and capital gains tax liabilities.
• Adaptation to Life Changes: Financial advisers play a vital role in advising on necessary revisions to the family trust as life events occur, tax laws change, or the family’s financial needs evolve.

A financial adviser provides tailored estate planning advice and guides you on how to set up a family trust in Australia.

Ready to Build an Investment Portfolio? 

In estate planning, a family trust helps protect assets from creditors, minimises tax obligations, and distributes income at your beneficiaries’ tax rates. It protects assets from creditors, even in bankruptcy. However, it’s crucial to consult with experienced financial advisers on how to set up a family trust in Australia.

At Newcastle Financial Planning Group, we can work with you and your solicitor to formulate an estate plan that is thorough and works to maximise the financial benefits to your family and beneficiaries. Hear from our satisfied clients.

Call us or book online to secure your initial meeting with us today and get started!

 

References:

• https://www.ato.gov.au/businesses-and-organisations/trusts/in-detail/family-trusts-concessions
• https://www.dss.gov.au/disability-and-carers-programs-services/special-disability-trusts
• https://www.ato.gov.au/businesses-and-organisations/trusts/trusts-registering-and-reporting-for-tax
• https://www.ato.gov.au/businesses-and-organisations/trusts/in-detail/family-trusts-concessions