Do you need a family trust? When it's beneficial, when it isn't, and what you need to know about how it all works

This week's question is, 'do I need a family trust?'. I have had a few questions about this over the past weeks, however in order to avoid making this 'personal advice', I thought I'd just talk about it in more general terms.

What is a family trust?

1. Family Trust refers to a Discretionary Trust set up to hold a family's assets or to conduct a family business
   • Established by a family member for the benefit of members of the 'family group'
2. Established to hold assets for mainly two reasons:
   • asset protection or
   • tax purposes (will come back to this)

The Trust

1. Settlor - settlor executes the trust deed and then, generally, has no further involvement in the trust
2. Appointor – Has the power to add or remove trustees (controlling power)
3. Trustee
   1. Role – the trustee is responsible for the trust and its assets
      • broad powers to conduct the trust and manage its assets
   2. Types
      • Individual – Can be mum and dad for instance, in a family situation
      • Corporate – Company acting as trustee – Directors
        • Additional layer of protection and flexibility

4. Beneficiaries
   1. Named (Primary) – receives the benefits
   2. Secondary – Spouse, de facto, children (generally family members)
   3. Company – Corporate beneficiary

How a trust works

Assets are owned by the trustees, held in the trust

• A separate environment, even if transferring from individual to same individual as a trustee, it's still a transfer of ownership

Types of assets

1. Shares
   • Franking credits received by beneficiaries
2. Property in trusts
   • Loss of negative gearing, unless income can fully offset
   • Property taxes

Trust income - Distributions

1. All distributions must be made only to people who qualify under the terms of the trust deed to be beneficiaries of the trust.
   • Distributions are not payments! - completed on tax returns but don't actually have to be physically paid out
2. Forms part of a beneficiary's assessable income - taxed at personal marginal tax rate
   • Trust does not have to pay income tax on income that is distributed to the beneficiaries
   • Trust pays tax on undistributed income
3. Where distributions go wrong
   • If a family trust makes a family trust election and then pays out to someone not a member of the family group, they will be taxed at the maximum rate possible
   • Undistributed income is taxed in the hands of the trustee at the top marginal tax rate of 45%
   • Penalty tax rates can apply to distributions made to minors

Benefits

1. Flexibility – Tax planning
   • favourable taxation treatment by ensuring all family members use their income tax "tax-free thresholds'
   • Capital gains tax can be distributed – split between beneficiaries
2. Asset protection
   • protecting the family group's assets from the liabilities of one or more of the family members (for instance, in the event of a family member's bankruptcy or insolvency)
3. Estate planning
   • provides a mechanism to pass family assets to future generations
     • Trust life of 80 years
   • Helps avoid challenges to the will following a death of a senior member of the family

Situations where it will work

1. Wanting to invest and accumulate wealth
   • OR, own a business
2. Asset protection – Are you in a situation you will be sued
3. Taxation planning – Will you have people to distribute to?

What is important for a trust – Long term Planning!

1. Transferring owned assets in has problems
   • CGT – The transfer of assets from your own name into a trust is a sale
   • Stamp Duty (For property) – The trust would need to technically buy the property off you

Thanks for listening…if you have a question or want to provide any feedback, go to https://financeandfury.com.au/contact/