Family Trusts: What Are the Tax Benefits?
A family trust can be an attractive way to structure your finances for the tax benefits it offers. Find out more in this article.
What is a family trust?
A family trust is a form of agreement where one party (the trustee) holds assets for the benefit of family members or other nominated persons. A family trust is discretionary because the trustee has the power to annually determine what and how much each beneficiary receives. Trustee power applies only to the nominated beneficiaries named in the trust deed. The basic elements are:
A written agreement between parties controlling the operation of the trust.
The person responsible for establishing the trust and naming the parties.
The person who identifies the trustee.
The operator and also legal owner of the trust’s assets
Individuals or companies who may receive benefits from the trust.
Length of operation
Usually 80 years (except South Australia – unlimited).
Further, as the legal owner of trust property, the trustee is responsible for distributing trust assets to beneficiaries.
Advantages of a Family Trust
Placing assets within a family trust is beneficial for several reasons, which we have detailed below.
1. Tax Purposes
Trusts may be advantageous if the beneficiaries fall within a lower tax bracket than the trustee. Effective income distribution to beneficiaries at lower marginal tax rates may result in a substantially lower amount of tax paid. Trusts also benefit from a 50% Capital Gains Tax (CGT) discount when compared to registered companies. This is available for the disposal of assets held for over 1 year.
2. Asset Protection
Assets held in trust are normally immune from creditor claims should a beneficiary become bankrupt. This is because the legal owner is the trustee. Additionally, should the trustee become bankrupt, trust assets are also likely to be immune from creditor claims because they do not form part of the trustee’s personal assets. Generally, trust assets are also immune in situations such as marriage breakdown, property settlement, and will challenges. A family trust also may allow the trustee to exercise financial control over beneficiaries. This may be important if they do not have a steady stream of income, or are fiscally irresponsible.
3. Other Advantages
Family trusts provide a strong basis for families to plan for their future. The trust provides a platform of opportunity for beneficiaries to put money away for retirement, donate to charity, or engage in other investments.
Disadvantages of a Family Trust
There are also several disadvantages that must be weighed against the advantages. For instance;
- Failure to distribute all income from the trust to beneficiaries may result in the trustee paying more tax than the beneficiaries would pay.
- Income distributed to beneficiaries may also be taxed at a higher rate if they are below 18 years of age.
- Beneficiaries do not have certain proprietary legal interests in property.
- Running the trust can be costly and time-consuming if unfamiliar with compliance obligations.
Family Trusts for Small Businesses
Family trusts are particularly beneficial when operating a small business. This is because they protect personal assets from business assets if the business fails. For example, protection may be important, particularly when operating vulnerable or risky enterprises.
What else do I need to know?
Interested in starting a trust for your family? For Lawpath’s step-by-step guide, click here. Trusts are subject to specific rules set out by the Australian Taxation Office. Before taking action, you should always seek advice from a lawyer or tax professional.
You can visit the ATO website for more information.
Alistair is a Legal Intern at Lawpath. He is currently studying a Bachelor of Laws at Macquarie University. He is primarily interested in how changes in the digital space influence business activity, privacy, and freedom of speech.