Family Trust (2021 Update)
A Family Trust is different to a Will. They can be especially useful for asset protection and tax planning.
What is a Family Trust?
A family trust is a type of discretionary trust. This structure is set up to hold a family’s assets or to conduct a family business. Through the trust, a person (called the trustee) is under an obligation to hold property or assets for the benefit of another person or persons (the beneficiaries).
In a Family Trust, the trustee has a large amount of discretionary power. This includes determining which beneficiaries receive the property or assets from the trust and how much each is to receive. The trustee’s power extends to the beneficiaries nominated in the trust.
Why have a Family Trust?
Two main reasons to get a Family Trust is for asset protection and tax benefits.
- Asset Protection: A trust can protect the ownership of your assets while you are alive. You can transfer the legal ownership of the assets to the trust while continuing to use and enjoy them. For example, if the family home is in a trust, you no longer personally own the house – but you could still live in it if that’s what the trust deed states. Trusts can also protect selected assets against claims and creditors. For example, to protect your family home from the potential failure of a business venture.
- Tax Planning: Choosing a family trust entity can allow a trustee and its beneficiaries to arrange their tax affairs in a way which minimises their tax liability. The trustee decides who gets the income and capital the trust owns. This could suit someone on the highest tax bracket with family members listed as beneficiaries who are on lower rates. For example, rental income from an investment property owned by the trust could go to members of the trust on lower incomes. The same principle also applies to the taxing of dividend payments from shares owned by the trust.
Some other benefits include flexible and cost-effective estate planning, investment advantages and retirement planning.
Person that creates or set up the trust such as an accountant or lawyer. Their main role is to determine the terms of the trust deed.
Person that is the legal owner of the property in the trust. Their main role is to administer the trust and invest the trust funds and distribute trust income and capital to the beneficiaries.
Person that benefits from the trust money and/or property. They have a right to be considered when the trustee makes a decision to distribute trust funds.
Is a Family Trust different from a Will?
Yes! A Family trust and a Will are different legal documents. Both are useful estate planning devices that serve different purposes, and both can work together to create a complete estate plan.
One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. In contrast, a trust can be used to begin distributing property before death, at death or afterwards.
A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust. You can learn more about creating a will here. A trust, on the other hand, covers only property that has been transferred to the trust. In order for property to be included in a trust, it must be put in the name of the trust. A trust lawyer may be a useful place to start for those looking to create a family trust.
Daniel is a Legal Technology Intern at Lawpath. He is currently studying a Bachelor of Laws/Commerce double degree at the University of Wollongong. He is interested in corporate, commercial and sports law, with a focus on how legal technology can help produce effective outcomes.