How Do I Set Up a Family Trust?

In Short

• Establishing a Family Trust: Select reliable trustees and define beneficiaries. Draft a trust deed outlining terms. Execute and stamp the deed as per legal requirements.
• Trustee Responsibilities: Trustees manage trust assets, make discretionary distributions, and ensure compliance with the trust deed.
• Legal Formalities: Ensure the trust deed is properly executed and stamped to meet legal obligations.

Tips for Businesses

Setting up a family trust can offer tax benefits and asset protection. It’s crucial to choose trustworthy trustees and clearly define beneficiaries. Ensure the trust deed is accurately drafted and complies with legal requirements. Consult with legal professionals to navigate the complexities and maintain compliance.

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Table of Contents

• 1. Choose Your Trustees and Beneficiaries
• 2. Draft the Trust Deed
• 3. Settle the Trust
• 4. Trustee Signs the Deed
• 5. Trust Stamping
• 6. Let’s Get Down to Business
• Advantages and Disadvantages of Family Trusts
• Key Takeaways
• Frequently Asked Questions

Are you thinking about setting up a discretionary (or family) trust in Australia? Are you unsure how to do so or what the process involves? If so, look no further. This article provides you with a step-by-step guide on how to set up a family trust. This will help you navigate the journey of setting up a discretionary trust. 

1. Choose Your Trustees and Beneficiaries

First, you must answer two key questions:

• Who will act as my trustee(s)?
• Who will be my beneficiary/beneficiaries?

Trustees

A trustee is a person or entity that legally owns and exercises day-to-day control of the trust. You must choose someone that you believe is reliable. This is because the trustee is ultimately responsible for managing and administering the trust on behalf of the trust’s beneficiaries. For example, the trustee can invest in the trust’s assets and enter into contracts and arrangements on the trust’s behalf. A trustee can also distribute the trust’s assets and property to beneficiaries at its discretion. 

You can choose between a corporate and individual trustee. An individual trustee has low set-up and maintenance costs. On the other hand, establishing and selecting a corporate trustee is more complicated. However, a corporate trustee has the advantages of additional protection of trust assets and ease in succession planning. Indeed, corporations are not living, and the assets will remain constant, even if you replace a corporate trustee’s director. 

Beneficiaries

Turning to beneficiaries: the beneficiaries are the people or entities that will benefit from the trust. Essentially, they have beneficial ownership of the trust’s assets. 

In a discretionary trust, the beneficiaries have no fixed interest in the trust property. This means that any distribution made to them is entirely at the trustee’s discretion. However, this does not mean that beneficiaries have no rights. Indeed, beneficiaries have the right to receive correct and adequate information relating to the trustee’s management of the trust. 

It is preferable to name your beneficiaries as a particular class. Common classes named in a family trust include spouses or primary relatives. By naming your beneficiaries as a particular class, your trustee possesses a greater level of flexibility in determining who they can distribute the trust’s assets to. For example, the trustee can potentially better plan for tax by allocating distributions to both high and low income earning beneficiaries.

2. Draft the Trust Deed

The second step is to draft your trust deed. This is an essential step, as the trust establishes the trust deed and the legal rights and responsibilities of trustees and beneficiaries. The trust deed is a legal document that outlines the structure and management of the trust. It is important to remember that the trustee legally owns the trust property. Indeed, the trust deed should:

• identify the trustee, beneficiaries and settlor of the trust;
• nominate of the date on which the trust formally vests. This means it needs to indicate when the trust terminates and when the trustee must distribute all remaining trust assets. Usually, the vesting date is typically 80 years after the trust was first established;
• outline the trustee’s roles and responsibilities; and
• protect the trustee for liability incurred in connection with its role as the trustee by indemnifying them. However, this provision should exclude inappropriate and unlawful behaviour.

The trust deed can also nominate an appointor. An appointer has the power to remove or appoint a trustee. Having an appointer is a good idea when setting up a discretionary trust. As the beneficiaries have no formal claim on the trust property, it can be difficult for them to bring suit in cases where a trustee has not administered the trust properly. In these circumstances, an appointor can be a vital circuit breaker.

Given the importance and complexity of the trust deed, you should seek professional legal advice and assistance at this stage of the process. Advice from an expert will ensure you understand the contents of the trust deed and that you draft a document that suits your purposes.

3. Settle the Trust

The next step entails settling your trust. Settlement is a necessary legal process to establish your trust. To do this, a nominated settlor signs the trust deed and gives the trustee a nominal fee. The settlor should be an unrelated third party to the trust. For this reason, typically the settlor will be your accountant or lawyer. For income tax purposes, the settlor should not be a beneficiary of the trust itself.

4. Trustee Signs the Deed

The fourth step is to execute the trust deed. As part of the execution process, the trustee signs the trust deed and acknowledges its terms. It is essential for the trustee to read and understand the terms of the trust deed. The trustee must also voluntarily agree to act as trustee. Additionally, we recommend you sign the trust deed in a formal setting. For example, you can hold a meeting at your lawyer’s office. By doing so, you can ensure that all parties can attend and witness the signing of the deed. 

5. Trust Stamping

After you establish the trust and sign the trust deed, you may need to stamp the trust deed formally and pay stamp duty. Whether or not stamping of the trust and payment of stamp duty is required will depend on the state or territory in which you established the trust.

Again, professional legal advice in your jurisdiction is invaluable at this stage. Your lawyer can assist you in stamping the trust deed and paying the correct amount of duty within the designated period.

6. Let’s Get Down to Business

You are now ready to apply for a Tax File Number (TFN) and Australian Business Number (ABN) for the trust. You can apply for both online. Please be aware that this process is not instantaneous, and you must do each step separately.

Lastly, you need to open a bank account for the trustee in their name. It is important to check with your preferred bank beforehand to determine the information and documentation you require.

Advantages and Disadvantages of Family Trusts

Family trusts offer several advantages but also have some potential drawbacks. Understanding these can help you decide if establishing a family trust is right for your circumstances.

Advantages

One of the primary advantages of family trusts is their flexibility in distributing income and capital gains. Trustees can allocate distributions to beneficiaries in the most tax-effective manner, potentially reducing the overall tax burden for the family. This flexibility also extends to estate planning, allowing for smoother transfer of assets across generations without triggering capital gains tax events.

Asset protection is another significant benefit. Assets held in a family trust are generally protected from creditors in the event of bankruptcy or legal action against individual beneficiaries. This can be particularly valuable for business owners or professionals in high-risk occupations. Family trusts can also provide a level of privacy, as the trust deed is not a public document. This can benefit families who prefer to keep their financial affairs confidential.

Disadvantages

However, family trusts also have some disadvantages. The setup and ongoing management of a trust can be complex and costly. You’ll likely need professional advice from lawyers and accountants, both during establishment and for ongoing compliance.

There’s also a loss of direct control over assets. Once assets are transferred into the trust, they are owned by the trust, not by individuals. While the trustee manages these assets, they must do so in accordance with the trust deed and their fiduciary duties. Family trusts are also subject to strict tax laws and regulations. The Australian Taxation Office closely scrutinises trusts, and non-compliance penalties exist. Lastly, family trusts can potentially lead to disputes among beneficiaries, especially if there’s a perception of unfair treatment in distributions. Clear communication and a well-drafted trust deed are crucial to mitigate this risk.

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Key Takeaways

Setting up a family trust is not a straightforward process and involves many important decisions, so a lawyer is always recommended to guide you through all the steps. Specifically, you need to nominate trustees and beneficiaries. You must then draft the trust deed itself, settle, sign and stamp the trust. You must also follow some regulatory requirements, such as paying stamp duty and obtaining a TFN and ABN. 

So, if you have followed all these steps, your discretionary trust should be established and fully functional. Congratulations!

If you require any assistance with setting up a trust, get in contact with LegalVision’s highly experienced business structuring lawyers. Call us on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions