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Disclaimer: 

First of all, like everything else on the first page of Google, everything that we written on Family Trusts & Discretionary Trusts in Australia cannot be maintained in time for you to read. There are too many pages. Also, Google takes time to index anything. By the time it makes it there, part of it will be outdated. Contact your accountant or us with every one of the financial topics you find on Google.

Disclaimer out of the way!

 

A helpful definition of a Family Trust

Introduction

There are over 974,000 trusts in Australia! Yes, the family trust (probably the most common of them) is quite a powerful estate planning tool. It is designed to manage and protect family assets in Australia. As you may already be aware of, it offers various benefits, including asset protection, tax advantages, and avoiding the probate process. Understanding the fundamentals of a family trust can help Australians make informed decisions about their financial future. As such most people should be aware of the following to start with.

 

Historical Background

Why look at the history? It’s important to know why these things are created. The concept of trusts dates back to medieval England, where landowners would transfer their property to trustees to manage on behalf of beneficiaries, providing a way to bypass feudal duties and taxes. This system was adapted into Australian law, becoming an integral part of the country’s legal and financial landscape. There are over 974,000 trusts in Australia. Over time, trusts evolved to include various forms and purposes, including family trusts specifically designed to benefit multiple generations within a family.

 

 

Key Components of a Family Trust

A family trust in Australia involves several key components:

  1. Settlor: The person who creates the trust and transfers assets into it. In Australia, the settlor often plays a minimal role after the trust is established. Many will simply use their accountants
  2. Trustee: The individual or entity responsible for managing the trust according to its terms. Trustees in Australia have significant fiduciary duties and must act in the best interests of the beneficiaries.
  3. Beneficiaries: The family members who benefit from the trust. These can include the settlor, their spouse, children, grandchildren, and other relatives.
  4. Trust Deed: The legal document outlining the trust’s terms and conditions. The deed must comply with Australian law and detail how the trust operates.

Other Types of  Trusts

Trusts in Australia can be classified into several types based on their structure and purpose:

  1. Discretionary Trusts: The trustee has the discretion to decide how the trust income and capital are distributed among beneficiaries. These are the most common type of family trust in Australia. (Usually that is what people think of when they are thinking of family trusts)
  2. Unit Trusts: Beneficiaries hold units in the trust, similar to shares in a company, and distributions are made according to unit holdings.
  3. Hybrid Trusts: Combine elements of both discretionary and unit trusts.
  4. Testamentary Trusts: Established through the settlor’s will and activated upon their death, often used to manage inheritance.

Benefits of Family Trusts

Family trusts offer numerous advantages in the Australian context:

  1. Privacy Protection: Trusts are not public records, unlike wills, providing privacy for the family.
  2. Avoiding Probate: Assets in a trust bypass the probate process, ensuring a quicker and more efficient transfer to beneficiaries.
  3. Estate Tax Benefits: Properly structured trusts can minimize estate taxes. Although Australia does not have an estate or inheritance tax, capital gains tax (CGT) considerations are important.
  4. Asset Protection: Trust assets are safeguarded from creditors and legal claims.
  5. Management Flexibility: Trusts provide flexibility in managing and distributing assets.
  6. Control Over Distribution: The settlor can specify how and when beneficiaries receive their inheritance.
  7. Continuity and Succession Planning: Trusts ensure a smooth transition of asset ownership across generations.
  8. Special Needs Provision: Trusts can provide for family members with special needs without affecting their eligibility for government benefits.
  9. Charitable Contributions: Trusts can facilitate charitable giving as part of the family’s legacy.
  10. Simplified Transfer Process: Trusts streamline the asset transfer process, reducing administrative burdens.

Legal Framework

Family trusts are governed by both federal and state laws in Australia, which can vary significantly. Key legal considerations include:

  1. Trust Formation: Requirements for establishing a trust, including drafting and executing the trust deed. This usually involves legal advice to ensure compliance with the law.
  2. Trustee Duties: Legal responsibilities of trustees, including fiduciary duties to act in the best interests of beneficiaries. Trustees must comply with the trust deed and relevant legislation.
  3. Trust Administration: Ongoing management of the trust, including record-keeping and reporting. Trustees must keep accurate records and may need to prepare annual financial statements.
  4. Beneficiary Rights: Legal rights of beneficiaries to receive information and distributions. Beneficiaries can sometimes challenge trustee decisions in court.
  5. Trust Modification and Termination: Procedures for amending or dissolving the trust. This can be complex and often requires legal advice.

Common Misconceptions

There are several misconceptions about family trusts in Australia:

  1. Only for the Wealthy: While trusts are often associated with wealthy families, they can benefit families of all financial backgrounds.
  2. Loss of Control: Many believe setting up a trust means losing control over assets, but discretionary trusts allow for considerable control through the role of the trustee.
  3. Complex and Expensive: Although setting up a trust involves legal and administrative costs, the benefits often outweigh the expenses. Trusts can actually simplify estate planning and management in the long run.

Setting Up a Family Trust

Establishing a family trust in Australia involves several steps:

  1. Define Objectives: Clearly outline the goals and purposes of the trust. This might include asset protection, tax planning, or providing for future generations.
  2. Choose a Trustee: Select a trustworthy and capable individual or entity to manage the trust. Trustees can be family members, friends, or professional trustees.
  3. Draft the Trust Deed: Work with a legal professional to create a comprehensive trust deed. This document will outline the terms of the trust and ensure it complies with Australian law.
  4. Fund the Trust: Transfer assets into the trust. This can include property, investments, and other assets.
  5. Register the Trust: Complete any required legal registrations. In some states, this may involve registering the trust with the state revenue office.
  6. Ongoing Management: Ensure the trust is properly managed and complies with legal requirements. This includes maintaining records, preparing financial statements, and complying with tax obligations.

Tax Implications

Taxation is a critical aspect of managing a family trust in Australia. While family trusts can offer tax advantages, they must be managed correctly to comply with Australian tax law. Key tax considerations include:

  1. Income Tax: Trust income is generally taxed at the beneficiaries’ marginal tax rates. Trustees must distribute income annually to avoid being taxed at the highest marginal rate.
  2. Capital Gains Tax (CGT): Trusts can trigger CGT events when assets are transferred into or out of the trust. Proper planning can help manage CGT liabilities.
  3. GST and Stamp Duty: These may apply to certain transactions involving trust property. Legal advice is often necessary to navigate these complexities.
  4. Trust Losses: Special rules apply to the use of trust losses, often limiting their ability to offset income in future years.

Trustee Responsibilities

Trustees in Australia have significant responsibilities and must act in the best interests of the beneficiaries. Key duties include:

  1. Fiduciary Duty: Acting honestly and in good faith, avoiding conflicts of interest, and managing the trust assets prudently.
  2. Record Keeping: Maintaining accurate records of trust transactions and decisions.
  3. Reporting: Providing beneficiaries with necessary information about the trust’s administration and financial performance.
  4. Compliance: Ensuring the trust complies with all relevant legal and tax requirements.

Risks and Challenges

While family trusts offer many benefits, they also come with risks and challenges:

  1. Legal Disputes: Family trusts can lead to conflicts among beneficiaries or between beneficiaries and trustees.
  2. Financial Risks: Mismanagement of trust assets can lead to financial losses.
  3. Complexity: Trusts can be complex to establish and administer, requiring ongoing legal and financial advice.
  4. Changing Laws: Trusts must comply with evolving laws and regulations, which can impact their effectiveness.

Conclusion

A family trust is a versatile and effective tool for managing and protecting family assets in Australia. If you understand it’s main parts, types, benefits, and legal framework of family trusts, folks can make informed decisions that secure their financial future and provide for multiple generations. But setting up a family trust requires careful planning and professional guidance.  The long-term advantages make it a worthwhile investment.

So, if you need help or just advice with it all, click here to contact us.