What Are Family Trusts?
MBA, BSc, DipFP
Financial Planner / Managing Partner
What Are Family Trusts?
These days setting up a Family Trust Fund is not just for the wealthy. Many small business owners are using the vehicle of a Family or Discretionary Trust to protect their family from potential loss, whilst at the same time taking advantage of tax benefits. Let’s take a look at what a Family trust is, and how to set one up.
What Is A Family Trust Fund?
A Family Trust, otherwise known as a Discretionary Trust, is a structure which is set up to hold assets and distribute income to beneficiaries. These beneficiaries can be family members, companies, other trusts, or even charities. There are a number of benefits to holding assets in a Family Trust.
What Are The Advantages Of A Family Trust?
- Having your family assets in a trust protects them from creditors, bankruptcy, lawsuits and family breakdowns.
- Depending on the structure and the beneficiaries there can be significant tax benefits.[i]
- Trusts protect vulnerable members of the family. Beneficiaries receive an income but do not have access to the underlying assets of the trust, so those with physical or cognitive disabilities, or with addition or gambling problems are protected from the loss of their income-producing assets.
- Since Trusts sit outside a Will, the assets of a Trust are protected in the event of a challenge to a will.
What Are The Disadvantages Of A Family Trust?
- Depending on the level of complexity they can be expensive to set up and manage.
- Undistributed income is taxed at the highest marginal rate, so you need to take care to distribute income fully every year.
- It can be problematic if trustees disagree, especially if they are family members.
Who’s Who In A Family Trust
There are four important positions involved in a family trust.
Settlor – is the person who provides the assets which will be held in the trust and signs the trust deed. This is often a legal or financial representative.
Appointor – is the person who appoints the trustees, and if necessary, makes decisions on replacing them. Since this is an important responsibility, it is advisable to have more than one Appointor, and include a consensus for change requirements. How this works will form part of the trust deed.
Trustee – is the person who is responsible for the management of the trust and the distribution of income. There may be individual or corporate trustees, depending on the deed, and you may have multiple trustees. Trustees are accountable to the beneficiaries and are liable to creditors.
Beneficiary – is the person/people who benefit from the income generated by the trust. These may be individuals or companies. Beneficiaries have no access to the trust assets, but receive income based on the terms of the deed.
It is important to choose who fills the roles of Appointor and Trustee very carefully as changing them requires a change to the trust deed, and depending on the structure of the trust, they both have a great deal of control over the fund.
Setting Up A Family Trust
There are a few key steps to setting up a Family or Discretionary Trust.
- Decide what assets will be included in the trust. This might be shares, bonds, cash, property, art, antiques or any combination of these. It may also be your family business.[ii]
- Choose the Appointors and Trustees. It is ideal to have more than one of each. Think carefully about how you want the dynamic to work in case of disagreement. Look for someone knowledgeable, reliable, and above all, trustworthy.
- Decide on the Beneficiaries. You need to consider not only who they are, but what percentage of the income they should each receive. Beneficiaries may be individuals, companies, charities or other trusts.
- Prepare the Trust Deed. This deed sets out all the conditions related to the trust and will act as a framework which the trustees must abide by. It will should include objectives, conditions of payment, and details of how and when the trust may be terminated.
- Take care of any Government requirements and Registration. Some states will require stamp duty to be paid, and all states will require your Trust to have a TFN[iii] and an ABN[iv].
- Open a Bank Account. This is usually done in the name of the Trustee to allow them access for income distribution and management.
Once you have set up the trust, if you change your mind about any of the conditions such as beneficiaries or trustees, you will need to prepare a Deed of Variation, so it is a good idea to think all your choices through carefully before preparing the initial deed.
What Advice Do I Need?
Because there are legal and tax implications it is important to get both professional legal and financial advice when setting up a Family Trust. A good financial advisor can help you and will usually recommend a lawyer and accountant with the right experience and expertise to ensure your trust is set up properly.
If you would like advice on whether a Family or Discretionary Trust would be suitable for your own circumstances Manly Financial Services can help you. Please give us a call on (02) 9976 3388 or contact us through the button below, to find out more.