Family trusts can provide a great deal of financial benefits, but setting up a family trust is not entirely straightforward. You’ll likely need to seek the advice of a lawyer and an accountant, but this guide will provide you with enough information to get you started.
You’ll also find a glossary of the legal terms at the bottom of this article.
For help setting up your family trust, call Rose Lawyers on 03 9878 5222.
How to set up a family trust
Family trusts are also known as discretionary trusts, Inter Vivos trusts or Living trusts. They are regularly used to hold a family's business assets.
Their aim is to provide tax protection and asset protection.
There are six steps to setting up a family trust:
- Select a trustee – This can be a person, a group of people or private company that has been set up to manage the trust.
- Draft the trust deed – This sets out the terms of the trust and will require the help of a lawyer.
- Settle the trust – This is done when the settlor signs the trust deed and gives the initial settlement sum.
- Sign the trust Deed – The trustee or trustees must agree to the terms of the trust deed and sign it.
- Apply for an ABN and a TFN – After the trust has been established these applications must be made.
- Open a bank account for the trust – The bank account is usually in the name of the trustee and the bank may require the ABN of the trust before opening the account.
Family trusts are often used to hold a family's business assets.
Family trust benefits
There are many financial benefits of setting up a family trust. This makes family trusts an attractive option for families who have members with large incomes or own a portfolio of assets, such as company shares.
There are three key benefits of setting up a family trust:
- Income tax is paid by the beneficiaries rather than the trust. This means income can be distributed to minimise the overall tax paid.
- Trust assets cannot be challenged in the manner that a Will can be challenged.
- Family assets are protected, as the liabilities of any member of the family do not have to be paid from the trust assets. Family assets can be passed to any person on the list of beneficiaries or to future generations of those listed as members of the family.
What Type of Family Trust is Right for You?
A hybrid trust combines the best elements of a discretionary trust and a unit trust. It has both unitholders and discretionary beneficiaries.
The trustee has the discretion to distribute income to Discretionary Beneficiaries. Unit holders have the right to receive any income and capital that has not been distributed to the Discretionary Beneficiaries.
The key benefits of a hybrid trust are:
- There are no formal audit requirements.
- You can stream income so that different beneficiaries receive different types of income.
- The unitholders can claim a deduction for the interest paid on the loan for the monies needed to buy units.
- The Hybrid trust can be used to give capital gains tax discounts.
A unit trust is usually used as a business entity.
Unlike a family trust, there is no discretion as to the distribution of income. The income is distributed to Unit holders in the proportion of the Units that are held. Those Units can be held by family trusts, companies or individuals.
Capital is also distributed as a proportion of the Units held against all the Units in the fund.
The key benefits of a unit trust are:
- The units can be purchased and sold.
- There is certainty about the entitlement to income and capital from assets held by the trust deed.
- The trust deed can include mechanisms for the transfer of units and for the determination of the price of Units.
- Unitholders have a proprietary interest in trust property. They can lodge caveats over land held in the trust.
Glossary of Family Trust Terms
Trust deed – trust is established under the terms of a trust deed which also confirms the powers and the obligations of the trustee of the family trust.
The settlor – This is the person that gives the trustee initial assets to hold on trust under the terms of the trust deed. The settlor rarely has any further involvement in the trust.
The trustee – The trustee holds assets under the terms of the trust deed and manages those assets in accordance with the terms of the deed.
The guardian – This is usually the senior member of the family. This person’s role is to make a change to the trustee if that ever becomes necessary.
The appointor – This is usually the senior member of the family. That person's role is to direct the trustee as to who should receive the income (or capital) from the trust.
Family trust income – The trustee distributes income from the trust to any person who qualifies as a beneficiary. The distribution is made in a way that minimises taxation.
Rose Lawyers can help you with setting up a family trust
The above information is of a general nature and should not be interpreted as legal advice. You should obtain independent legal and accounting advice before deciding to establish a family trust or making final decisions for the management of the trust assets.
Rose Lawyers have been practicing for over 35 years and we have a great deal of experience in setting up family trusts for our clients.
Let us help you set up your family trust, call Rose Lawyers on 03 9878 5222.