What is a Family Trust?

A family trust is a legal arrangement where a trustee (a person or a company) holds and manages assets for the benefit of family members, known as beneficiaries. It serves as a financial safety net to support your family now and in the future.

Do I Need a Family Trust?

The need for a family trust depends on your personal and financial circumstances. It is commonly used for:

• Asset Protection: Safeguarding assets from personal financial troubles.
• Tax Planning: Optimizing tax liabilities.
• Estate Planning: Managing and distributing assets after death.

If these areas are important to you, a family trust might be beneficial.

Benefits of a Family Trust

• Tax Efficiency: Distribute income to beneficiaries in lower tax brackets.
• Asset Protection: Secure assets from personal financial issues like bankruptcy.
• Estate Planning: Manage and distribute assets without a will.
• Flexibility: Adaptable distributions to beneficiaries.

Can I Reduce Tax with a Family Trust?

Yes, you can reduce tax by distributing the trust’s income among family members in lower tax brackets, a method known as income splitting. This reduces the overall tax liability. For example:

• Distribute income to non-working spouses, adult children, or retired family members with little to no other income.
• Spread capital gains among beneficiaries to take advantage of lower individual capital gains tax rates.

How Much Tax Does a Family Trust Pay?

In Australia, the tax rate for a family trust depends on income distribution:

• If all income is distributed to beneficiaries, the trust itself doesn’t pay tax; beneficiaries pay tax based on their individual rates.
• If the trust retains any income, it is taxed at the highest individual marginal rate.
• Special rates apply to distributions to minors.

Does the ATO Crack Down on Family Trusts?

Yes, the Australian Taxation Office (ATO) is closely monitoring family trusts to ensure compliance with tax laws and to prevent tax avoidance. They focus on complex arrangements that misuse the tax system, emphasizing proper trust management and reporting practices.

Do You Have to do a Tax Return for a Family Trust?

Yes, in Australia, a family trust must file a tax return. The trustee is responsible for lodging a trust tax return with the ATO each year, reporting the trust’s income, deductions, and income distribution to beneficiaries. The tax liability often passes to the beneficiaries, who report this income on their personal tax returns. If the trust retains any income, it may be liable to pay tax on that undistributed income.

How does a family trust work?

The trustee manages the trust’s assets for the benefit of the beneficiaries. They make decisions about how to invest the assets and distribute income or capital to the beneficiaries, according to the trust deed.

Why set up a family trust?

Tax Benefits: Distribute income to lower-taxed beneficiaries.
Protection of Assets: Protect your assets from creditors or legal disputes.
Succession Planning: Smooth transition of assets to future generations.

Can my salary be paid into a family trust?

Your salary as an individual cannot directly be paid into a family trust for tax purposes. Further the personal services in income rules may apply if you try to push contractor income into the family trust. However, a family business can distribute its profits from business and investments to beneficiaries.

Can I put a house into a family trust?

Yes, you can transfer the ownership of a house into a family trust. This might be done for asset protection or estate planning purposes. Get advice before doing so as it usually triggers stamp duty or transfer duty and can have CGT implications.

Can an accountant set up a family trust?

Yes, an accountant can assist in setting up a family trust using a lawyer or an incorporation service. It’s important to also involve a lawyer to ensure the trust deed is legally sound of you have special requirements or you have a complex business structure. Tax lawyers are often engaged when a trust is involved in a complex structure.

Are family trusts a good idea?

Family trusts can be a good idea for asset protection, tax planning, and estate planning. However, they’re not suitable for everyone and require careful consideration of personal circumstances.

Are family trusts protected from divorce?

In a divorce, assets within a family trust might be considered during the settlement process as a financial resource. However, the protection they offer can vary based on individual circumstances and legal decisions.

Are family trusts protected from creditors?

Family trusts offer a level of protection against creditors, but this depends on how and when the trust was set up and how it’s been managed. Some clawbacks can occur for pre-bankruptcy gifts, for example.

Should I hire a lawyer to set up a family trust?

Yes, it is highly advisable to hire a lawyer when creating a family trust. Establishing a trust involves intricate legal documentation, including drafting the trust deed, which is the core document outlining how the trust will operate.

A lawyer ensures that the trust is set up correctly and complies with legal requirements. They can also provide valuable advice on the structure of the trust, tax implications, and how to best protect assets and interests of beneficiaries.

Given the complexities and potential legal and financial ramifications of incorrectly setting up a trust, professional legal guidance is crucial for peace of mind and to safeguard against future disputes or compliance issues.

Contact us today for any questions about setting up your family trust.