What is a family trust? What are its benefits?

Summary

• A trust is a legal arrangement by private individuals under which ownership of one’s assets, including cash, stocks and bonds are protected in an account.
• It is managed by an individual or a group of individuals to benefit another person/persons.
• A family trust is generally common for families with private businesses and other income-generating operations.

Trusts are among the most popular investment structures in Australia. Against the widespread belief that trusts are for the super-rich, these investment structures can even be used by moderately well-to-do individuals to protect their personal, family, and business assets. However, each comes with its own specific procedures, regulations, and tax considerations.

A trust is a legal arrangement by private individuals under which, ownership of one’s assets, including cash, stocks and bonds, is protected in an account that an individual, or a group of individuals, looks after for the benefit of another person/persons.

The individuals who provide assets are termed as settlors, while the ones involved in the management and distribution of the assigned assets are trustees.  The ones who receive these assets are beneficiaries.

Australia has several trusts such as family or discretionary, unit or fixed, hybrid and special disability trusts.

READ MORE: What is super and is it worth getting insurance through it?

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Family trust: Who owns assets in a family trust?

Family trusts are the most common trusts in Australia. Also known as a discretionary trust, a family trust is generally common for families with private businesses and other income-generating operations. Family trusts give trustees the discretion to decide who receives distributions and how often payouts are handed out. These trusts are recognised in almost all Australian states and are also comparatively easy to establish and operate.

The beneficiaries in the family trust are generally related. A trust may also include family companies and other family trusts. A ‘test individual’ determines the parties to the trust. A ‘test individual’ is someone whose family group would be included as a beneficiary of the trust.

The major beneficiaries who could be included in the trust include grandparents (both of test individual and individual’s spouse) and their spouses, parents and their spouses, siblings and their spouses, test individual, nieces and nephews and their spouses, children and their spouses and lineal descendants and their spouses.

READ MORE: Australian Real Estate Investment Trusts

The beneficiaries may also include registered charities.

The other important terms include a grantor, who creates the trust and a trust agreement -- the document that sets up a trust.

What are the benefits of a family trust?

Protection of assets

The main benefit of a family trust is that it protects assets in the situation of a business failure. Moreover, since the assets in a family trust belong to the trustee and not the individual beneficiaries, these cannot be used to pay the dues to the creditors of an individual beneficiary.

In addition, family trusts help protect assets in case of a breakdown in marriage in the future or property settlement under a family law.  There are more chances of the assets being not part of the family’s property settlement than those directly held by an individual.  It could also avoid future challenges with respect to a ‘Will’ if assets are part of a family trust.

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The family trusts also help protect assets from vulnerable beneficiaries who could make unwise financial decisions in the future.

Tax benefits

There are tax benefits associated with family trusts. Family trusts generally limit potential estate taxes and exposure to gift taxes. In addition, there are advantages in terms of capital gains tax for trusts compared to companies.

Flexibility and simplicity

You can easily adjust and amend the terms in family trusts. Furthermore, it is comparatively easy to prepare a family trust. Transferring asset ownership to trust is relatively simple.

In addition, the terms under family trusts offer a high degree of control in terms of what should be done with the assets if you pass away.

What are the disadvantages of a family trust?

Here are four significant disadvantages of running a family trust:

• Several costs are associated with maintaining trust.
• The losses cannot be allocated to beneficiaries.
• Running operations of trusts can be challenging in case of a family dispute.
• Any income earned by a trust which remains undistributed gets taxed at the top marginal tax rate.
• Personal ownership of assets is lost when managed through a trust.

Is it worth setting up a family trust?

Before you go ahead with setting up a family trust, it is essential to understand its purpose, and advantages and disadvantages to your business. If a trust is set up correctly, you can easily receive several tax benefits.

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