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How to Set Up a Family Trust

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Setting up a family trust is a great way to optimise your tax position and share assets and distributions with family members.  In saying that, it is important that you get the right advice before setting up your family trust. We’ll break down the benefits of family trusts and how to set up a family trust.

You can watch the video below for a quick summary, or keep reading for some more in-depth information.

What is a trust?

Trusts in their most basic form are a structure that allows a person or company to hold an asset for the benefit of others. The person who controls the asset is the trustee and those who benefit are the beneficiaries.

The assets held in a trust can vary but typically include property, shares, businesses, and business premises. The creator of the trust, known as the settler, sets out the specific rules as to how these assets should be managed in a document called the trust deed.

Why create a trust?

Trusts are mainly created to separate a person’s assets from their personal estate. Once a settlor assigns those assets to a trust, they no longer own them, effectively shielding the assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits.

Other reasons for creating a trust include:

  • Controlling the assets of individuals who are too young or incapacitated to manage their own financial affairs.
  • Protecting people from squandering their fortunes.
  • Managing and distributing pension/retirement funds during an individual’s employment years

What is a family trust?

A family trust also commonly known as a discretionary trust; it is a trust established to hold a family’s assets or operate a business. Generally, they are established for asset protection and/or tax purposes.

Family trusts are the most common type of trust used by business owners in Australia.

By putting assets in a trust, you don’t own the assets in your name. The assets are legally controlled by the trustee. However, you can potentially control exactly how those assets are managed now and in the future. You have the power to set out who receives the income arising from the assets and when they receive it, as well as who receives the underlying capital represented by the assets themselves and when.

What parties make up a family trust?

Setting up a family trust requires the following people:

  • Trustee(s) – controls the day-to-day
    decisions and signs important documentation including tax returns
  • Appointor – Appoints the Trustee and has
    the power to change the Trustee
  • Beneficiaries – entities/individuals
    entitled to the trust’s income and assets
  • Settlor – third party who settles the
    Trust (nominal fee of $10 normally)

The Trustee can be individual(s) or a company.

Establish Your Family Trust

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Other types of trusts

Before we dive further into family trusts let’s take a quick look at the other Trusts used in Australia:

Unit or Fixed Trusts

A unit trust (also known as a fixed trust) differs from a family trust in that the trustee generally does not hold discretion over the distribution of assets to beneficiaries. These structures divide the trust property into units, similar to shares. Each beneficiary (known as a “unit holder”) owns a given number of those units, and at the end of each year, each unitholder receives a distribution from the trust.

Hybrid Trusts

A hybrid trust bears characteristics of both family and unit trusts. The trustee is empowered to distribute trust income and capital among nominated beneficiaries – as with discretionary trusts.

However, the income and capital are proportionally distributed – as with unit trusts – based on the number of units each beneficiary holds. Hybrid trusts are often the favoured structures when there are significant investment assets involved, due to their income tax and capital gains tax benefits.

Special Disability Trusts

The special disability trust allows immediate family members and carers to set up a trust to benefit another family member. Before the trust can be set up, the prospective beneficiary must be assessed as severely disabled per the requirements of the trust’s legislation.

Family members are then allowed to make private financial contributions for the future and current care of the beneficiary.

Family Trust Benefits

The key benefits of setting up a family trust, include:

  • Flexibility on income distributions. The trustee decides before June 30 each financial year how that year’s trust income is to be distributed between the various beneficiaries. Generally, income will be distributed to beneficiaries in lower tax brackets.
  • Ability to distribute income to adult children (aged over 18 years) who are either studying or working part-time and are in lower tax brackets.*
  • Ability to stream capital gains and franked dividends to specific beneficiaries.
  • Provides asset protection from creditors, ex-spouses, legal claims, etc.
  • Ideal structure for owning capital appreciating assets (such as land and shares) as the beneficiaries can access the 50% CGT discount on any realised capital gains (if the assets were owned for more than 12 months).
  • Allows for succession planning and the transfer of wealth to future generations without immediate tax consequences.
  • Ability to hold personal use assets such as holiday homes, boats, racehorses, etc.
  • Reduces the land tax payable on multiple properties by owning each property in a separate family trust (thereby having each family trust access the tax-free threshold for each individual property).
  • There are no investment rules, no contribution rules, and no preservation rules (unlike superannuation).

The downside is that to the extent that they don’t distribute the income of the trust, the trustees themselves are liable to tax on the undistributed income and a rate of tax generally higher than the beneficiaries themselves would have to pay.

 

* As of February 2022, the ATO has implemented new rulings (Taxpayer Alert TA 2022/1) affecting distributions to adult children. In some cases, the tax rate for these distributions may be 47% rather than their individual marginal tax rate. Due to these changes, it is best to seek professional tax advice to ensure you are aware of the tax obligations for your trust. Learn more >>

How to set up a family trust

Setting up a family trust is fairly straight-forward and involves a number of key steps. Some basics to remember upfront are:

  • Individuals who originally provide the assets are generally referred to as settlors. Those charged with managing trusts and distributing their assigned assets are known as trustees.
  • Those who ultimately receive the assets contained within the trusts are known as beneficiaries.

There are 8 key steps to be aware of so you know how to set up a family trust correctly:

Step 1: Decide upon original trust assets

List all the holdings, along with their current value, to be placed in the trust.

Step 2: Appoint trustee(s)

Designate an individual or financial institution to serve as trustee. Choose wisely, as this person or entity will wield significant legal authority and control over your trust assets.

Since trustees of discretionary trusts have wide powers, it is essential to choose a responsible and impartial individual to embody this position. For this reason, it may be best to appoint an independent trustee, who has no allegiance to any of the beneficiaries listed in the trust deed document.

Step 3: Determine beneficiaries

Compile a list of people or entities entitled to receive benefits. Include the percentage breakdown of assets intended for each recipient.

Step 4: Draft the trust deed

A trust deed is a legal document prescribing the rules that govern your fund and the powers of the appointed trustee. It includes the fund’s objectives, specifies original trust assets, identifies the beneficiaries, outlines how benefits are to be paid (either via lump sum or an income stream), details how the trust may be terminated, and establishes rules for operating the trust bank account.

Trust deeds must be signed and dated by all trustees, executed according to state or territory laws, and regularly reviewed and updated as required. Deeds should be created by a qualified professional.

Step 5: Stamping

Stamp duty is a state-based tax that may be payable on the trust deed, depending on the state or territory. Stamping can be arranged directly through the relevant revenue authority or via a lawyer or accountant in your given state or territory.

Step 6: Register as a business

As with other Australian business structures, you will need an ABN (Australian Business Number), TFN (Tax File Number), and a business name for the trust. Depending on the trust type and complexity, you may be required to register it as a company.

Step 7: Open a bank account

Once the trust has been established, a trust bank account should be opened in the trustee’s name. The bank may require personal details about the trustee(s) and other parties involved before it will open the account.

Step 8: Commence trust activity

Once the bank account has been established, the trust becomes operational and can accept contributions or make investments, subject to terms outlined in the trust deed.

What is the cost to establish a Family Trust?

Costs do vary, but at POP Business we charge a nominal fee of $900 plus gst to establish a family trust.

This cost includes the Trust Deed, acting as settlor, facilitating the stamp duty if applicable and attending to the registrations of ABN and TFN.  However, this does not include any lawyer fees associated with deed stamping.

The following stamp duty will be payable depending on which state the Trust will operate out of:

State
Amount $
When Payable
NSW
500
90 days from execution
VIC
200
30 days from execution
TAS
50
90 days from execution
NT
20
60 days from execution
QLD
N/A
WA
N/A
SA
N/A
ACT
N/A

How long does it take to establish a family trust?

So now you know how to set up a family trust, but how long does it take to set one up? A family trust takes on average 10 days to be fully established. Documentation is required to be signed by the relevant members. 

If a corporate trustee is required, this will need to be established first which may take an additional day. If stamp duty is required, this normally takes 5 business days to be processed.

Corporate Trustee vs Individual Trustee

If the Trust will be trading as a business, it is advisable
to have a company trustee also known as a corporate trustee. By doing this, the trustee company could be sued in the event of a dispute. As the company is a separate legal entity, the individuals would be safe from litigation, and personal assets are protected.

If the Trust will have passive investments with low risk, individual trustee(s) are fine.

ATO and family trusts

While trusts provide significant benefits they are not all sweetness and light. It’s fair to say that trusts have become synonymous with tax avoidance, particularly where they are used by the highly wealthy. And this means the ATO have a keen focus on ensuring trusts are not being used to hide income altogether, conceal the underlying ownership of assets and/or to facilitate transfers of funds tax free between family and business groups through mechanisms such as interest free loans.

Annual obligations of a family trust

If the Trust earned income, it is required to lodge a Trust tax return with the Australian Taxation Office. Further, the Trust can also be required to maintain accounting records including a profit and loss statement and balance sheet. Any original source documentation is required to be maintained for a period of 5 years.

The Trustee(s) is also required to sign a Trustee Resolution before 30 June each year which stipulates the income apportionment to the beneficiaries.

Getting good advice is key

Trusts have become a common way of structuring financial affairs, and a logical, tax-efficient means of distributing earnings that protect wealth for future generations.

If you have substantial personal and/or business assets and have never considered setting up a trust for the benefit of your family, there is plenty to be gained by having one, and if you already have a trust structure in place, now is probably the time to do some due diligence to look at what you’ve got, how the structure has been used and if it’s meeting your goals.

Start your Family Trust using POP Business

While online platforms can offer some guidance on trusts, seeking professional advice is highly recommended to ensure you understand the pros and cons, your obligation’s and ATO requirements. Need help? The team at POP Business can provide expert advice on all types of trusts, including family trusts. To find out more, call the team today – 1300 180 630 or visit follow the links below to get started.

Start Your Family Trust Today

Begin your journey to tax-effectiveness today!
Get your trust established by the experts at POP Business

Patrick Sargent

Patrick Sargent

I am a chartered accountant, registered tax agent and a co-founder and CEO of POP. My passion lies in creating high-performing teams, optimising business processes and leading the strategic direction of the business. I am also a member of Chartered Accountants ANZ and a Fellow of the Australian Institute of Company Directors. My expertise includes helping small businesses with a range of accounting services, including: tax preparation, business advisory, accounting and bookkeeping, and personal tax planning, as well as company, trust and partnership tax returns and more.

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