Your Guide to Setting Up Your Family Trust in Australia

Written by

Greg Bramich

FCPA, Director & Co-Founder

Resident snack monster. Ultimate Lebron fan boy.

Ever thought about setting up a family trust but felt overwhelmed by the process? Well, you’re not alone. Many of us have pondered this financial strategy, especially when we’re looking to protect our hard-earned assets or set up a nest egg for the future. Whether you’re a small business owner in bustling Melbourne or a retiree enjoying the Gold Coast sunshine, understanding family trusts can be a game-changer for your financial future. So, let’s dive in and demystify the world of family trusts, shall we?

Key Highlights:

• What is a Family Trust? A family trust protects assets, manages wealth, and offers tax benefits for family members. Key players include the settlor (who sets up the trust), trustee (who manages assets), and beneficiaries (those who benefit).
• Why Set Up a Family Trust? Benefits include asset protection, tax savings, and smoother estate planning. It’s ideal for business owners, high-risk professionals, and retirees looking to safeguard wealth.
• How to Set Up and Manage: Create a trust deed, appoint trustees, register for a TFN/ABN, and open a trust bank account. Regular reviews and proper management ensure compliance and financial efficiency.

What Is a Family Trust, and Who Are the Key Players?

First things first, what exactly is a family trust? Well, it’s not as complicated as it might sound. A family trust is essentially a type of discretionary trust created to benefit family members. Think of it as a financial safety net for your loved ones, with some nifty tax benefits thrown in for good measure.

But who’s who in this trust game? Let’s break it down:

1. The Settlor: This is the person who kicks things off by establishing the trust. They’re like the captain who sets the ship sailing but then steps back.
2. The Appointor: Consider them the power behind the throne. They can appoint or remove trustees, making them a crucial player in the trust’s management.
3. The Trustee: This is the person or company responsible for managing the trust’s assets. They’re like the ship’s navigator, making sure everything stays on course.
4. The Beneficiaries: These are the family members who stand to benefit from the trust. They’re the passengers on our metaphorical ship, enjoying the journey without having to steer.

According to LawPath, a leading Australian legal tech company, “A family trust is a powerful tool for protecting and managing family wealth across generations.” It’s not just about stashing away money; it’s about creating a legacy.

Benefits of A Family Trust

Now, you might be wondering, “What’s in it for me?” Well, quite a lot, actually. Let’s look at some of the key benefits:

1. Asset Protection: It’s like a financial fortress for your assets. If you’re in a high-risk profession (looking at you, doctors and business owners), this can be a real lifesaver.
2. Tax Efficiency: Who doesn’t love paying less tax? Family trusts can help distribute income in a way that minimises the overall tax burden.
3. Estate Planning: It’s a smoother way to pass on wealth to the next generation. No more complicated disputes!
4. Protecting Vulnerable Family Members: Got a family member who needs extra support? A trust can ensure they’re taken care of long-term.

As the team at Newcastle Financial Group puts it, “Family trusts offer a flexible structure for managing family wealth and can provide significant tax advantages when set up and managed correctly.”

But let’s be real; nothing’s perfect. Here’s a quick pros and cons list to give you the full picture:

Who Needs a Family Trust?

Now, you might be thinking, “Is this really for me?” Well, let’s see if you fit the bill:

Business Owners: If you’re running your own show, a family trust can be a brilliant way to protect your personal assets from business liabilities. It’s like having a financial firewall between your business and personal life.

High-Risk Professionals: Doctors, lawyers, financial advisors – if you’re in a profession where lawsuits are a real risk, a family trust can offer that extra layer of protection. It’s like professional indemnity insurance for your personal wealth.

High Net Worth Individuals: Got a sizeable nest egg? A family trust can help you manage and protect it more effectively. It’s not about being greedy; it’s about being smart with what you’ve worked hard to earn.

Retirees with High Taxable Income: If you’re enjoying your golden years but finding yourself in a high tax bracket, a family trust could help you distribute income more tax-efficiently. It’s like giving yourself a pay rise without actually earning more!

Seven Types of Family Trust in Australia

Alright, now we’re getting into the nitty-gritty. There are several types of family trusts, each with its own quirks and perks. Let’s break them down:

#1 Discretionary Trust

This is the most common type. It gives the trustee the power to decide how to distribute income and capital among beneficiaries. It’s like being Santa Claus, deciding who gets what each year.

#2 Unit Trust

Think of this as a company structure but for trusts. Beneficiaries hold units, similar to shares in a company. It’s great for business partnerships within families.

#3 Hybrid Trust

As the name suggests, this is a mix of different trust types. It’s flexible and can be tailored to specific family needs. It’s the Swiss Army knife of trusts!

#4 Fixed Trust

In this type, beneficiaries’ entitlements are fixed and predetermined. It’s less flexible but can be useful in certain situations, like when you want to ensure specific outcomes.

#5 Testamentary Trust

This one’s created by a will and comes into effect after the will-maker’s death. It’s a way to continue looking after your family even when you’re no longer around.

#6 Special Disability Trust

Designed specifically to provide for the care and accommodation needs of a severely disabled person. It’s a compassionate option for families in this situation.

#7 Charitable Trust

While not strictly a family trust, this type is used to support charitable causes. It’s a way to leave a lasting, positive impact on society.

As the experts at TMS Financial note, “The choice of trust type depends on your specific circumstances and goals. It’s crucial to get professional advice to ensure you choose the right structure for your family’s needs.”

Step-by-Step Guide to Set Up a Family Trust in Australia

Ready to take the plunge? Here’s a step-by-step guide to get you started:

Step 1: Determine Your Goals and Choose the Right Type of Family Trust. Think about what you want to achieve. Is it asset protection? Tax benefits? Estate planning? Your goals will guide your choice of trust type.

Step 2: Choose Trustees and Define Beneficiaries. Decide who will manage the trust and who will benefit from it. Remember, trustees have significant responsibilities, so choose wisely!

Step 3: Draft The Trust Deed. This is the legal document that sets out the rules of your trust. It’s crucial to get this right, so professional help is a must here.

Step 4: Settle The Family Trust. This involves the settlor (remember them?) contributing a small amount (usually $10) to establish the trust.

Step 5: Sign The Deed. All parties need to sign the trust deed. It’s like signing a contract but for your family’s financial future.

Step 6: Pay Stamp Duty. This varies by state, so check your local requirements. In Victoria, for example, you’ll need to pay this to the State Revenue Office.

Step 7: Apply for ABN, TFN, and consider GST Registration. These are the administrative bits. Your trust needs its own Tax File Number (TFN) and Australian Business Number (ABN).

Step 8: Open A Separate Family Trust Bank Account. Keep trust finances separate from personal ones. It’s not just good practice; it’s essential for proper management.

Step 9: Manage The Trust. This includes making distributions, keeping records, and ensuring compliance with all legal obligations.

How to Manage a Family Trust?

Setting up the trust is just the beginning. Here’s how to keep it running smoothly:

Income and Capital Distribution. Decide how to distribute income and capital among beneficiaries each year. This is where the tax benefits come into play, so plan carefully.

Annual Tax Return. Yes, your trust needs to lodge its own tax return. It’s like doing your personal taxes, but for your family’s financial structure.

Compliance with Legal Obligations. Stay on top of any changes in trust law or tax regulations. It’s not the most exciting part, but it’s crucial to keep your trust legal and effective.

Regular Review and Adjustment. Your family’s needs will change over time, so review your trust structure regularly. It’s like servicing your car – regular check-ups keep everything running smoothly.

As GS Advisory, a leading Australian financial advisory firm, points out, “Effective management of a family trust requires ongoing attention and expertise. It’s not a set-and-forget arrangement, but the benefits can be substantial when done right.”

In conclusion, setting up a family trust in Australia can be a smart move for many families. It offers protection, tax benefits, and a way to manage wealth across generations. However, it’s not a decision to be taken lightly. The setup process can be complex, and ongoing management requires commitment and expertise.

Remember, while this guide gives you a solid overview, it’s always best to consult with financial and legal professionals before making any big decisions. They can provide tailored advice based on your specific circumstances and ensure you’re making the most of your family’s trust.

So, what do you reckon? Is a family trust the right move for your clan? Whether you’re a savvy business owner in Sydney or a forward-thinking retiree in Perth, it’s worth considering how a family trust could fit into your financial strategy.