A Family Trust is different to a Will. They can be especially useful for asset protection and tax planning.
What is a Family Trust?
Family trust is a type of discretionary trust 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 the power to determine which beneficiaries receive the property or assets from the trust and how much each is to receive. The discretionary power of the trustee is limited to a nominated class of beneficiaries that are outlined in the trust.
Why have a Family Trust?
Two main reasons to get a Family Trust is for asset protect 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. Trust 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.
Some other benefits include flexible and cost-effective estate planning, investment advantages and retirement planning.
Who are involved?
- The Settlor:
Person that creates or set up the trust Eg. accountant or lawyer. Their main role is to determine the terms of the trust deed.
- The Trustee:
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.
- 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 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. By 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. 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.
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Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.