How to Leverage a Family Trust for Effective Business Structuring

In Short

• Lean on a family trust to protect business assets and separate liabilities by placing ownership into a corporate trustee structure (e.g. trust holds company shares)

• A discretionary (family) trust allows flexible distribution of profits—trustees can allocate income to beneficiaries in lower tax brackets

• Using a corporate trustee means limited liability, legal continuity and simpler succession without transferring trust assets

Tips for Businesses
Choose a corporate trustee to protect personal assets and simplify succession. Use income distribution strategies to minimise tax across the family. Ensure your trust deed is up to date and reflects your business goals. Always seek legal and accounting advice to get the structure right from the start.

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Table of Contents

• What is a Family Trust?
• Individual vs Corporate Trustees
• Using a Family Trust in Business: Two Structures
• Key Benefits of including a Family Trust in your Business Structure 
• Key Takeaways
• Frequently Asked Questions

If you are navigating the complexities of business structuring, you are not alone. Many business owners are seeking smart strategies to optimise their operations, protect assets and set the stage for long-term success. A family trust is a powerful tool that can help you achieve these goals and enhance your business structure. In this article, we will explore the benefits of leveraging a family trust in your business structure, from asset protection to tax efficiency and seamless succession planning.

What is a Family Trust?

A family trust is a legal structure that enables a person or entity (the trustee) to hold and manage assets for the benefit of family members (the beneficiaries). A family trust can be set up to protect family assets, such as:

• real estate;
• investments; and
• business assets.

Individual vs Corporate Trustees

One of the first decisions when establishing a family trust is choosing the type of trustee: an individual or a company. This choice impacts the trust’s liability exposure, continuity, and administrative simplicity.

Individual Trustee

An individual trustee is a person who holds the legal title to the trust’s assets in their own name. While this option may be more cost-effective initially, it comes with limitations:

• Liability: An individual trustee is personally liable for any debts or obligations of the trust. This can put their personal assets at risk.
• Succession Risks: When an individual trustee passes away, the trust assets do not automatically transfer to the beneficiaries. Instead:
  • a new trustee must be appointed according to the trust deed;
  • the deceased trustee’s legal personal representative (such as the executor of their estate) may manage the trust temporarily; and
  • trust assets must be formally transferred to the new trustee. This can involve delays, administrative processes, and additional costs.

Corporate Trustee

A corporate trustee is a company established specifically to act as the trustee of a trust. For example:

• Continuity: If a director or shareholder passes away, the company (and thus the trustee) continues to exist, ensuring no interruption to trust operations or ownership of trust assets.
• Limited Liability: A company has limited liability. This means that directors and shareholders generally aren’t personally liable for the trust’s debts, providing an added layer of asset protection.
• Succession Simplicity: New directors can be appointed without needing to transfer ownership of trust assets, which simplifies succession planning.

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Using a Family Trust in Business: Two Structures

There are two main ways to involve a family trust in your business structure:

1. Trust Holding Shares in a Company (Holding Structure)

This is the most common structure for business owners. The family trust owns shares in a trading company, which operates the business.

• the trust receives dividends from the company;
• these dividends can be distributed to beneficiaries in a tax-effective manner; and
• this structure also provides legal separation between the operating business and family assets.

2. Family Trust Operating the Business Directly (Trading Trust)

Alternatively, the family trust itself can operate the business directly, known as a trading trust.

• the trust owns the business assets and enters into contracts with third parties;
• income and liabilities belong to the trust (not a company); and
• this structure can be riskier because the trustee is directly exposed to trading risks. Hence, a corporate trustee is highly recommended.

Key Benefits of including a Family Trust in your Business Structure 

Asset Protection

One of the key advantages of incorporating a family trust into your business structure is the enhanced asset protection it provides.

Tax Efficiency

A family trust can offer considerable flexibility in distributing income. Generally, family trusts do not pay income tax on their net income each financial year, unlike companies. Instead, the beneficiaries pay tax on their share of the trust’s net income. 

In a family trust, the trustee has the discretion to distribute assets, income, or capital gains to different beneficiaries, taking into account their respective tax positions. This enables you to minimise the overall tax paid by the family.

Succession Planning

A family trust with an individual trustee will be required to appoint a new trustee in the event of death or incapacity. The deceased trustee’s legal personal representative may be authorised to temporarily manage the trust. However, the new trustee must be formally appointed as outlined in the trust deed.

Key Takeaways

A family trust helps safeguard business assets from personal liabilities, providing an additional layer of security in your business structure. By giving the trustee discretion over income and capital assets distributions, family trusts can help reduce the overall tax burden through strategic allocations to family members in lower tax brackets. A corporate trustee allows for a seamless transition of control. 

If you have any questions, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Can a family trust run a business directly?

Yes, but it’s riskier. This is known as a trading trust. It’s safer to use a corporate trustee to limit personal liability if the trust operates the business directly.

How does a family trust help with taxes?

Family trusts enable the trustee to distribute income to beneficiaries in a tax-effective manner, often reducing the total tax paid by the family by allocating income to members in lower tax brackets.