Family trusts are still a popular tool in Australia for asset protection, tax management, and estate planning. You might recall the publicity around the most famous family trust in Australia – The Hope Margaret Hancock Trust. Worth $5 billion, there is no wonder the trust was the subject of a dispute between Australia’s richest woman, Gina Rinehart, and other family members. But lessons can be learnt from one of the wealthiest families in Australia, when it comes to family trusts.
Firstly, what is a family trust and why would someone decide to set up such a trust? Here we answer your questions about family trusts, and discover why families may choose to start a trust.
What is a Family Trust?
A family trust is a structure where an entity (the trustee) holds assets for the benefit of another entity (the beneficiary). The trust is not a separate legal entity like a company, the trustee is the legal entity that acts on behalf of the trust.
What are the benefits of a Family Trust?
- Income distribution: When a family trust distributes all its income to beneficiaries, the trust itself does not pay tax. Instead, the beneficiaries include their portion of the trust’s net income in their own tax returns and are taxed at their relevant tax rates. This means the trust may be able to distribute income to beneficiaries in lower tax brackets, potentially reducing the overall tax burden for the family. Commonly we see families utilising this benefit when one parent stays at home to look after a young family, while the other parent continues to work full-time.
- Asset protection: Assets held within a family trust are generally protected from claims by creditors against individual beneficiaries. The trustee typically has discretionary powers which means assets within the trust are not considered to be owned by the individual beneficiaries. When might this matter? If an individual beneficiary of the trust was bankrupt or going through a divorce, a family trust in most cases provides greater protection of the assets within the trust.
- Estate planning and protecting future generations: Separate to inheritances through a will, family trusts can ensure smooth succession planning to pass on assets to future generations. Family trusts minimise estate contestation, avoid the probate process and enable preservation of wealth across generations. Some clients establish a family trust to ensure assets intended for the financial stability of younger children are protected to support their care and needs if they passed away unexpectedly. This is common when children of a previous marriage exist, and the unrelated parent has personal investments intended for their existing or future family.
What are the disadvantages of a Family Trust?
- Undistributed Income: If the trust retains any income (i.e. does not distribute it to beneficiaries), that income is taxed at the highest individual marginal tax rate, which is currently 45%, plus the Medicare levy of 2%, totalling 47%.
- Distributions to minors: Special tax rates apply to distributions made to beneficiaries under 18 years old, often resulting in higher tax liabilities to discourage income splitting with minors.
Things to consider when transferring property into your Family Trust
We highly recommend you see us to discuss your options before executing a transfer to minimise the chance of unexpected consequences. For example, transferring property into a family trust will involve:
- Capital Gains Tax (CGT): Transferring property may trigger a CGT event, which may result in potential CGT implications.
- Legal transfer: Executing a legal transfer of title from the current owner to the trustee of the trust so it is important to get this right.
- Stamp duty: Applicable stamp duty on the transfer (varies by state or territory.)
What are other common types of Trusts?
Family trusts might not be the answer, here are some other common trusts in Australia:
- Discretionary Trusts (Family Trusts are just one type of discretionary trust): Trustees generally have discretion over the income and capital distribution among beneficiaries, as allowable by the trust deed.
- Unit Trusts: Beneficiaries (unit holders) have fixed entitlements to the trust’s income and capital, proportional to their units.
- Hybrid Trusts: Combine features of discretionary and unit trusts, allowing both fixed and discretionary distributions.
- Testamentary Trusts: Established through a will, coming into effect upon the testator’s death.
- Special Disability Trusts: Set up to provide for the care and accommodation needs of a person with a severe disability.
When do I get a professional involved in establishing a Trust?
You may have gathered by now that setting up, choosing the type, and managing a trust involves compliance, costs, and complexities that require professional advice. We recommend you seek our guidance and get us involved early on to discuss these complexities. Contact Nexis today to find out more.
