The Complete Guide to Family Trusts

Family trusts are an effective wealth management tool, and one of the structures clients ask us about most: how to set one up, who can be a trustee or beneficiary, and what the advantages and disadvantages actually are. Here’s an overview.

A family trust is an arrangement where a trustee holds and manages assets on behalf of a family, with ownership of the assets separated from the right to benefit from them. It’s usually established by one family member for the benefit of the wider family, and generally needs a valid Family Trust Election (FTE) to access certain tax concessions. The trust must also pass a family control test, meaning it can only be controlled by that family group, and its income can generally only be distributed to members of the nominated “family group” or to the family’s own businesses. A well-structured family trust can help protect assets from creditors, pass wealth to the next generation, and let each beneficiary make use of their own tax-free threshold.

Who counts as “family” for this purpose?

• The person’s parents, grandparents, siblings, or spouse
• The person’s nieces, nephews, or their children and spouses
• The direct descendants of the person’s nieces or nephews
• The person’s spouse, or anyone who becomes part of the family group through one of the relationships above

Advantages of a family trust

1. Where a beneficiary buys shares and holds them for the required minimum period, franking credits attached to dividend income can be used to reduce tax on that income.
2. It’s generally easier to carry forward a current-year trust loss to offset future income. A trust that isn’t a family trust, a non-fixed trust for instance, needs to pass more tests (a 50% stake test, a control test, an income-injection test, and tests on how trust income was distributed) to carry a loss forward. A family trust only needs to pass the income-injection test.
3. Being classified as an “individual” for certain purposes helps a company or fixed trust with losses pass the “continuity of ownership” test, and helps someone holding more than 50% of units in a non-fixed trust pass the 50% stake test.
4. The trustee has discretion over how trust income and assets are distributed. Trust assets generally sit outside the personal estates of the trustee and beneficiaries for bankruptcy purposes. The trustee can flexibly allocate income and assets each year, which can help manage the family’s overall tax position. By law, this year’s distribution decision must be finalised by 30 June.

Disadvantages of a family trust

The main one: because a family trust can only distribute to people or entities within the family group, distributing income to anyone outside that group attracts tax at the top marginal rate plus Medicare levy on that amount, a significant penalty rate designed to discourage distributions outside the family.

How trust income is taxed

If trust income isn’t distributed to a beneficiary by year end, it’s taxed to the trustee at the top marginal rate plus Medicare levy. Once income is distributed to a beneficiary, that beneficiary can use their own tax-free threshold and marginal rates against it.

Common questions

Can the sole trustee and sole beneficiary be the same person?

No. A trust is a legal relationship between a trustee and a beneficiary. If the only trustee and only beneficiary were the same person, there’d be no one else for that legal relationship to exist with. A trustee can also be one of several beneficiaries, as long as there’s at least one other beneficiary.

Can the trust distribute assets if a beneficiary has died?

Yes, provided two conditions are met: the trust must be referred to in the deceased beneficiary’s will, and the relevant beneficiary interest in the trust must also be addressed in that will.

Can the trust itself be a beneficiary of itself?

No. A trust isn’t a separate legal person, so it can’t be a beneficiary of the family trust it forms (the “ABC Family Trust” can’t be a beneficiary of the ABC Family Trust). The trust’s trustee, however, can be a beneficiary.

Can a corporate trustee also be a beneficiary?

Yes. For example, “ABC Pty Ltd” can be both the trustee and a beneficiary of the “ABC Family Trust.” A company and individuals can also be beneficiaries at the same time; the right structure depends on your circumstances.

Corporate trustee or individual trustee: which is better?

For asset protection, it’s common to use a dedicated non-trading company as trustee, with all family members as directors. This adds a small ongoing cost (the company’s annual review fee) but strengthens the separation between trust assets and personal liability.

Does a trust need an ABN?

Not compulsorily, but it’s usually worth having. It makes dealing with the ATO simpler, and you’ll need one to provide (or be provided) certain goods and services. You’ll also need one once the trust’s turnover requires GST registration.

Who can be the settlor?

The settlor establishes the trust by executing the trust deed and contributing the initial settlement sum. They must be an independent party, not the trustee or a beneficiary, and not their spouse or child. Often this is a friend, or the accountant helping set up the trust. Once the trust is established, the settlor has no further role.

Should the trust have an appointor?

An appointor holds ultimate practical control over the trust. They can wind it up, or replace the trustee if the trustee isn’t following their direction. A trust can operate without one initially, but it’s worth appointing one to plan for what happens if the trustee becomes bankrupt or dies.

A family trust can be a genuinely effective structure, but it needs to be set up and run properly to deliver those benefits. If you’re thinking about establishing one, or already have one and have questions about how it’s running, get in touch and we’ll talk it through based on your situation.