A family trust or “discretionary trust” is an agreement whereby a person or a company agrees to hold an asset or assets for the benefit of others, usually their family members. This article will answer what is a family trust, and outline their advantages so as to provide a better understanding as to why they remain popular business structures in Australia.
What is a family trust?
Sometimes, people use ‘family trust’ and ‘discretionary trust’ interchangeably. The word discretionary simply refers to the Trustee’s powers or “discretion” in deciding which beneficiary or beneficiaries get the Trust’s net income and capital each year.
Key players in establishing a family trust
The Appointer decides who will be the Trustee of the trust.
The Trustee legally owns the Family Trust’s asset(s) and holds the asset(s) on trust for the benefit of a group of family members. As such, the Trustee’s name should appear on all ownership documents. The Trustee must act in the best interests of all the beneficiaries at all times. This duty is referred to as one of “utmost good faith.”
A Trustee can be a competent natural person over the age of 18 and who is not bankrupt or under some other legal disability. More likely, however, the Trustee is a shelf company set up specifically to act as the Trustee of the family trust. A company is a valuable structure to manage the family trust because of its perpetual existence. The Trustee will not die or become unable to manage its affairs. This simplifies the process, as you will not need to change trustees or re-register ownership with authorities.
A beneficiary is the person or persons for whose benefit the asset is held. The Trust Deed will usually specify the family trust’s beneficiaries.
Advantages of a family trust
Generally, Mum and/or Dad are the Trustee and decide each year on the income or capital distributions from the trust to the beneficiaries. In this sense, a family trust’s discretionary nature and flexibility positions it as a popular business structure for families to establish.
Family trusts also present significant income tax advantages. The Trustee is able to distribute to select family members on lower incomes (i.e. children who are full-time students or a stay-at-home spouse) and who benefit from marginal tax scales. The family trust has also been used to reduce the amount of assets in family members for assets or means-testing purposes. More commonly, the family trust holds shares and land – that is, assets that appreciate in value. This allows capital gains to be distributed to individuals who are taxed at concessional rates.
A family trust can also provide asset protection by placing valuable assets beyond the reach of potential creditors. In most cases, a creditor cannot take assets held by a person as a trustee in bankruptcy. Likewise, creditors cannot take assets held by a company as trustee for a family trust in the event of that company’s liquidation (subject to exceptions).
A family trust is a popular vehicle in business and commerce because of the income tax advantages and asset protection it can afford. It is important though to first speak with your accountant about whether a family trust is the most appropriate business structure for your financial circumstances. If you have any questions or need assistance in setting up your family trust, you should speak with one of LegalVision’s experienced business lawyers on 1300 544 755.