Family Trusts
Understanding Family Trusts: A Comprehensive Guide
When planning for future wealth management and financial protection for your family, you might have heard of an instrument called a 'Family Trust.' In Australia, these are widespread, but many people are not entirely sure what they entail. In this post, we will break down the concept of Family Trusts and discuss their utility and benefits.
What is a Family Trust?
A Family Trust, often referred to as a Discretionary Trust, is a legal arrangement that enables the trustees to hold assets or properties for the benefit of specific beneficiaries, usually family members. It provides the trustees with the discretion to determine the allocation and distribution of assets and income to beneficiaries.
The trustee can be an individual, group of individuals or a company, who manages the trust in line with the stipulations of the trust deed. The trust deed is a legal document that outlines the operation of the trust and the trustee's obligations. In a Family Trust, the beneficiaries do not have a fixed entitlement or interest in the trust assets, and the distribution of income or capital is at the trustee's discretion.
The Benefits and Utility of Family Trusts
Family Trusts are popular among Australian families for a multitude of reasons. Let's delve into some of the most prominent benefits and utilities of establishing a Family Trust:
1. Asset Protection
Family Trusts provide excellent protection for assets. The trust property is owned by the trust, not by the beneficiaries, making it difficult for creditors to access in the event of bankruptcy or business failure. This separation of beneficial and legal ownership helps safeguard family assets against financial risk.
2. Estate Planning
Family Trusts offer an effective way to manage the transfer of assets to future generations without the necessity of triggering capital gains tax or stamp duty, which would be the case if the assets were owned personally.
3. Tax Planning
The discretionary nature of Family Trusts can also provide tax advantages. Trustees can distribute income to beneficiaries in lower tax brackets, thereby reducing the overall tax paid by the trust beneficiaries as a group. The tax-free threshold for adults in Australia as of the date of this article is AUD 18,200, meaning beneficiaries can receive this amount tax-free each year.
4. Succession Planning
In business, a Family Trust can simplify the transition of control, particularly for family businesses. Upon the death of a business owner, control of the trust can be passed to a successor without disturbing the underlying ownership of the business assets.
5. Flexible Distribution of Income
With a Family Trust, the trustee has the power to determine how the income of the trust is distributed among the beneficiaries each year. This flexibility allows the trust's income to be distributed in the most tax-effective way.
While Family Trusts offer numerous benefits, it's important to remember that they aren't suitable for every family or circumstance. Establishing and running a Family Trust can be complex, requiring strict compliance with legal requirements and regulatory oversight.
Trustees bear significant legal responsibility. If they fail to meet these obligations, they may be personally liable for any loss the trust incurs. It's also worth noting that the cost of establishing and maintaining a Family Trust can be relatively high, involving trust deed creation, potential stamp duty, and ongoing accounting fees.
Therefore, it's essential to seek professional advice before establishing a Family Trust. We recommend taking the time to understand the advantages and disadvantages of Family Trusts and how they can be tailored to suit your family's needs. At Verge Legal, we have experienced solicitors who can guide you through the process and advise whether a Family Trust is right for your circumstances.