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How to Use a Family Trust to Save Tax

Table of Contents

What is a Family Trust?

There is nothing more Australian than using a family trust to save tax some say.

A family trust is usually a discretionary trust which means the trustee has discretion on how income and capital will be distributed each year.

A family trust can be set up to conduct a family business, hold your family’s assets or any other specific purpose​​. As it’s a discretionary trust where a trustee (either a person or a company controlled by the family) holds legal title to property for the benefit of the family members, who are the beneficiaries. This may be investments, shares in companies that carry on businesses, real estate or anything else.

Usually, one family member has control of the trust as trustee.

Related post: Family Trusts: The Complete Guide for Australians

Advantages of a Family Trust

The main advantages of a family trust are:

  1. Tax Planning: The main advantage of a family trust is its use in tax minimization. While a family trust is taxed at the highest income tax rate of 45%, the income distributed to beneficiaries is taxed at their individual tax rates. This structure allows for income splitting among family members, potentially reducing the overall tax liability​​​​.
  2. Asset Protection: Family trusts offer protection of family wealth from creditors. Since the trust holds the assets, and beneficiaries do not have legal rights over these assets, creditors have great difficulty accessing them even in bankruptcy cases​​​​. No structure is bullet-proof though, and specific laws can allow creditors to access trust property.
  3. Capital Gains Tax Discount: A family trust is eligible for a 50% discount on capital gains tax for profits made from selling assets it has held for more than 12 months​​​​.
  4. Protection of Children’s Inheritance: In Australia, a family trust can protect its capital from capital gains and income taxes, enhancing the distribution of wealth to children​​. A family trust is not an asset in a person’s will, instead the assets are governed by the trustee and the terms of the trust deed.

Disadvantages of a Family Trust

There are some disadvantages of a family trust which need careful planning to avoid:

  1. Restrictions on Business Growth: As income from a trust is typically distributed to avoid high tax rates, it can limit the reinvestment of profits back into the business​​. This can be partially alleviated by using bucket companies, but this can cause other issues.
  2. Family Disputes: The control and distribution of trust income can lead to disputes if the trust deed doesn’t clearly outline procedures for appointing trustees and distributing income​​. A single trustee is recommended.
  3. Liability of the Trustee: If an individual acts as the trustee, they are legally liable for the obligations of the trust, which can be risky. Often, a company is used as the trustee to mitigate this risk​​.

How Much Money Should I Have Before Setting Up a Family Trust?

There is no minimum required to set up a family trust. Depending how you plan to use it, there are practical thresholds:

  1. Investment Use: We usually recommend at least $100,000 AUD worth of capital to invest before looking into a family trust. Tax advice should be obtained if you wish to invest in real estate.
  2. Business Use: We recommend that trusts are established at the earliest point to operate a business, or hold shares in a company that will operate the business. A restructure into a trust may be possible but the costs are much higher.

You can discuss with us before deciding to establish a trust for your business or investments.

How Much Does a Family Trust Cost to Set Up?

Setting up a family trust can involve costs between $1,500 and $2,500 + GST. This includes the creation of the trust deed, advice on trustees, beneficiaries, and registration with tax authorities. There’s no specific minimum amount of money required, but these setup costs should be considered​.

Victoria and NSW also charge stamp duty on establishing a trust.

How Does Income Splitting Work?

A discretionary or family trust can decide who will receive income from the trust at the end of each year. This provides a significant tax advantage, as the trustee can split income by distributing trust income among various beneficiaries, taking advantage of their individual lower tax rates. This strategy reduces the total amount of tax paid on the trust income​​​​.

For example, if one spouse is on home duties for a period of time and the other is a high income earner, a trust can be useful to send income to the low income spouse and use their lower tax bracket. In retirement, both spouses aren’t working and the trustee may prefer to distribute 50:50 instead.

What Kinds of Income Can Go Through a Trust?

Income distributed through a family trust can include business income, investment returns, and any other income earned by the assets held within the trust. The trustee decides how this income is distributed among the beneficiaries​​.

For that income to go through the trust, the trust needs to own the asset. So you may need to transfer in assets, or fund the trust to buy them to get the tax benefits.

Can My Trust Buy Shares, Property, and Other Investments?

Yes, a family trust can hold various types of investments including shares, property, crypto, private fund investments, and almost any other financial asset. These investments are managed by the trustee for the benefit of the beneficiaries​​.

How Do Capital Gains Work with a Family Trust?

Capital gains in a family trust are subject to CGT, but the trust benefits from a 50% discount if it has held the asset for more than 12 months. This means only half of the capital gains are taxable​​​​.

A trust must distribute income and capital gains each year and who receives the capital gain may affect the 50% CGT discount. If a trust distributes the capital gain to an individual, trust or partnership, the 50% discount is kept. If the trust distributes to a company however, the 50% discount is reversed.

How Does a Trust Give Me Asset Protection?

A trust provides asset protection as the trust, not the beneficiaries, legally owns the assets. This shields the assets from creditors, even in bankruptcy cases. The assets in the trust are not considered personal assets of the beneficiaries and providing a layer of protection against financial liabilities​​​​.

In serious cases, the trust may still be attacked. An example would be, if a beneficiary gifted in all their funds to the trust and then went bankrupt, a creditor may still be able to claw those assets back.

Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.

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