How to Set-up a Family Trust in Australia: The Ultimate Guide

Understanding how to set up a family trust in Australia might seem daunting at first, but it doesn’t have to be. With some savvy advice and a solid grasp of how things work, safeguarding what you own, slashing tax bills, and ensuring a secure financial horizon for your loved ones becomes doable. 

From choosing the right trustee to creating a bulletproof trust deed, we’ve got you covered. We’ll untangle complicated legal terms and tax details for you. So, whether you’re a seasoned investor or just starting to build your wealth, read on to discover how to set up a family trust in Australia like a pro.

What is a family trust in Australia?

A family trust, also known as a discretionary trust, is a popular way to protect and manage assets in Australia. It’s an arrangement where a trustee holds assets on behalf of beneficiaries, which are typically family members. The trustee has the discretion to distribute trust income and capital to the beneficiaries according to the terms outlined in the trust deed.

As someone who has set up multiple family trusts over the years, I can attest to their effectiveness in safeguarding wealth and providing flexibility in distributing assets. Whether you’re looking to protect your family business, manage investments, or plan for future generations, a family trust can be a valuable tool in your financial strategy.

How does a family trust work?

The key parties in a family trust are the settlor (the person who establishes the trust), the trustee (who manages the trust), and the beneficiaries (who receive distributions from the trust). The settlor contributes an initial sum to the trust, which is then managed by the trustee according to the rules set out in the trust deed.

The trustee has the power to invest trust assets, distribute income and capital to beneficiaries, and make decisions in the best interests of the beneficiaries. Beneficiaries can include immediate and extended family members, as well as charities or other entities, depending on how the trust deed is set up.

Benefits of setting up a family trust

One of the main advantages of a family trust is asset protection. By holding assets in a trust, you can protect them from creditors, lawsuits, and other potential risks. This is especially important for business owners or professionals in high-risk occupations.

Family trusts also offer flexibility in estate planning and tax minimization. By distributing income and capital to beneficiaries in lower tax brackets, you can potentially reduce your overall tax liability. Plus, a family trust can help you avoid the complexities and costs of probate when passing assets to future generations.

Keen to know more about the process of setting up a trust? We have created a step by step to guide you through how to do so. 

Types of family trusts in australia

There are several types of family trusts in Australia, each with its own advantages and disadvantages. Discretionary trusts are the most common, offering the greatest flexibility in distributing income and capital. Unit trusts, on the other hand, provide more certainty for beneficiaries by assigning fixed entitlements to trust assets.

Other types of trusts include hybrid trusts (a combination of discretionary and unit trusts), testamentary trusts (created through a will), and special disability trusts (for beneficiaries with severe disabilities). The type of trust that’s right for you will depend on your specific goals and circumstances.

Setting up a family trust can be a complex process, but with the right advice and guidance, it can be a powerful way to protect and grow your wealth. By understanding the different types of trusts and their benefits, you can make an informed decision about whether a family trust is right for you and your loved ones.

How to set-up a family trust in Australia: step-by-step

As someone who has gone through this process multiple times, I can tell you that it’s crucial to get each step right to ensure your trust is legally valid and effective.

Here’s a breakdown of the main steps involved in setting up a family trust:

1. Choose a Trustee

The first step is to choose a trustee to manage the trust. This can be an individual (such as a family member or friend) or a corporate trustee (a company set up specifically to act as trustee). There are pros and cons to each option, which I’ll discuss in more detail later.

2. Create a Trust Deed

The trust deed is the legal document that sets out the rules and terms of the trust, including the powers of the trustee, the rights of the beneficiaries, and how the trust assets will be managed and distributed. It’s important to have the deed drafted by a qualified legal professional to ensure it’s legally valid and tailored to your specific needs.

3. Settle the Trust Fund

To establish the trust, the settlor (the person creating the trust) must make an initial contribution to the trust fund, known as the settled sum. This can be a nominal amount, such as $10 or $100, and is held by the trustee on behalf of the beneficiaries.

4. Apply for an ABN and TFN

The trust will need to apply for an Australian Business Number (ABN) and a Tax File Number (TFN) to operate as a legal entity and meet its tax obligations. This can be done through the Australian Business Register and the Australian Taxation Office, respectively.

5. Open a bank account

The trustee will need to open a separate bank account in the name of the trust to manage the trust’s finances and keep them separate from their personal assets. This is important for maintaining the integrity of the trust structure and avoiding any potential legal issues.

6. Transfer assets to the Trust

Once the trust is established, the trustee can begin transferring assets into the trust, such as property, investments, or business assets. These assets are then owned and managed by the trust for the benefit of the beneficiaries, according to the terms of the trust deed.

It’s important to keep accurate records of all assets transferred into the trust, as well as any income or distributions made from the trust. This will help ensure the trust is being managed properly and complying with all legal and tax requirements.

Setting up a family trust can be a complex and time-consuming process, but with the right guidance and attention to detail, it can be a valuable tool for protecting and managing your wealth for generations to come.

Choosing a Trustee for your family trust

Choosing the right trustee is one of the most important decisions you’ll make when setting up a family trust. The trustee is responsible for managing the trust assets, making investment decisions, and distributing income and capital to the beneficiaries, so it’s crucial to choose someone who is trustworthy, competent, and aligned with your goals.

As someone who has served as a trustee and appointed trustees for my own family trusts, I know firsthand the importance of getting this decision right. Here are some key considerations when choosing a trustee:

Individual Trustee vs Corporate Trustee

One of the first decisions you’ll need to make is whether to appoint an individual or a corporate trustee. An individual trustee can be a family member, friend, or professional advisor, while a corporate trustee is a company set up specifically to act as trustee.

There are advantages and disadvantages to each option. An individual trustee may be more familiar with your family’s needs and goals, but they also expose themselves to personal liability for the trust’s debts and legal obligations. A corporate trustee, on the other hand, provides greater asset protection and continuity, but may come with higher setup and ongoing costs.

Need a more in-depth guide on individual trustee vs corporate trustee? Fret not, we have created an article just for that.

Responsibilities of a Trustee

Regardless of whether you choose an individual or corporate trustee, it’s important to understand the responsibilities and obligations that come with the role. The trustee must act in the best interests of the beneficiaries at all times, and manage the trust assets prudently and in accordance with the trust deed.

This includes keeping accurate records, filing tax returns, and making distributions to beneficiaries according to the terms of the trust. The trustee must also be impartial and avoid conflicts of interest, and keep trust assets separate from their own personal assets.

Changing or removing a Trustee

Even with the best intentions, sometimes a trustee may need to be changed or removed. This can happen if the trustee becomes unable to perform their duties, if there is a dispute among the beneficiaries, or if the trustee is not acting in the best interests of the trust.

The process for changing or removing a trustee should be clearly outlined in the trust deed. Typically, the appointor (the person named in the trust deed with the power to appoint and remove trustees) will be responsible for making any changes, and the new trustee will need to be appointed in writing.

Choosing the right trustee is a critical step in setting up a successful family trust. By understanding the roles and responsibilities of a trustee, and carefully considering your options, you can ensure that your trust is managed effectively and in the best interests of your beneficiaries for years to come.

Creating a Family Trust Deed

The trust deed is the legal document that sets out the rules and terms of your family trust. It’s essentially the rulebook that the trustee must follow in managing the trust assets and making distributions to beneficiaries. As such, it’s crucial to get the trust deed right and ensure it reflects your specific needs and goals.

The importance of working with a qualified legal professional to draft and customize your deed cannot be understated. Here are some key considerations when creating a family trust deed:

Essential elements of a Trust Deed

While the specific terms of a trust deed can vary depending on your needs and circumstances, there are certain essential elements that should be included in every deed. These include:

• The name of the trust and the trustee
• The powers and responsibilities of the trustee
• The names and rights of the beneficiaries
• The rules for distributing income and capital to beneficiaries
• The duration of the trust (up to 80 years in most states)
• Provisions for amending or revoking the trust

It’s important to work with a legal professional to ensure that your trust deed includes all the necessary elements and is tailored to your specific needs.

Naming beneficiaries in the Trust Deed

One of the key decisions you’ll need to make when creating a family trust deed is who to name as beneficiaries. Most family trusts have a broad class of beneficiaries, which can include immediate and extended family members, as well as any additional beneficiaries you choose to include (such as charities or other entities).

It’s important to think carefully about who you want to include as beneficiaries, and how you want to structure the distribution of income and capital among them. You may also want to consider naming a specific group of “primary beneficiaries” who will be the main recipients of trust distributions.

Customising your Trust Deed

While there are certain standard elements that should be included in every family trust deed, there is also plenty of room for customization to suit your specific needs and goals. For example, you may want to include specific provisions for asset protection, tax planning, or succession planning.

You may also want to consider including provisions for excluding certain beneficiaries (such as those with drug or alcohol dependencies), or for allowing the trustee to make distributions to beneficiaries for specific purposes (such as education or medical expenses).

Creating a family trust deed is a complex process that requires careful consideration and professional advice. By working with a qualified legal professional and taking the time to customize your deed to your specific needs, you can ensure that your family trust is set up for success and able to meet your long-term goals.

Tax implications of a family trust

When it comes to knowing all there is about how to set-up a family trust, it’s important to fully understand the tax implications. Trusts are often used for tax planning purposes, but it’s crucial to know how they’re treated by the Australian Taxation Office (ATO).

While navigating the tax landscape can be tricky, doing this with expert support and an experienced family trusts provider is key. With a solid understanding of the basics, you can make informed decisions that benefit your family and your finances.

Income tax treatment of family trusts

In Australia, family trusts are not taxed as separate entities. Instead, the trust’s income is distributed to the beneficiaries, who are then taxed at their individual marginal tax rates. This can provide tax planning opportunities by distributing income to beneficiaries in lower tax brackets.

For example, if a trust earns $100,000 in a year and distributes $50,000 each to two adult beneficiaries who have no other income, they would pay significantly less tax than if the entire $100,000 was taxed at the highest marginal rate.

Capital gains tax considerations

When assets are transferred into or out of a family trust, there may be capital gains tax (CGT) implications. However, there are some CGT concessions available for small businesses and family trusts that meet certain eligibility criteria.

One such concession is the 15-year exemption, which allows a trust to disregard a capital gain if the asset has been owned for at least 15 years and the taxpayer is aged 55 or over and retiring or permanently incapacitated. This can be a valuable tool for succession planning and asset protection.

Distributing income to beneficiaries

The trustee must distribute the trust’s income to the beneficiaries by the end of each financial year (June 30) to avoid the trust being taxed at the highest marginal rate. The trustee has discretion over how much income to distribute to each beneficiary, subject to the terms of the trust deed.

It’s important to keep accurate records of all distributions and to ensure that each beneficiary reports their share of the trust’s income on their individual tax return. Failure to do so can result in penalties and interest charges.

In my experience, working with a qualified accountant or tax professional who specializes in trusts can be invaluable in navigating the complexities of trust taxation. They can help you develop a tax-effective distribution strategy that maximizes the benefits of your family trust while minimizing your tax liabilities.

Pros and cons of setting up a family trust

like any legal structure, it has its advantages and disadvantages. Again, a key perspective you need to know when looking at how to set-up a family trust are the pros and cons so you can see both sides of the coin.

Advantages of family trusts

One of the biggest advantages of a family trust is asset protection. Because the assets are owned by the trust rather than any individual, they are generally protected from creditors and legal claims against individual beneficiaries. This can provide valuable peace of mind, especially for business owners or those in high-risk professions.

Family trusts can also offer flexibility in distributing income and capital to beneficiaries. The trustee has discretion over how much to distribute to each beneficiary each year, which can be useful for tax planning purposes or to provide for family members with different needs.

Another advantage is the ability to pass on assets to future generations without the need for a will or probate. By setting up a family trust with clear succession planning provisions, you can ensure that your assets are distributed according to your wishes even after you’re gone.

Disadvantages of family trusts

Of course, family trusts also have their drawbacks. One is the initial cost and complexity of setting up the trust, which can require significant legal and accounting fees. There are also ongoing administrative and compliance costs, such as annual tax returns and record-keeping requirements.

Family trusts can also be inflexible once they’re established, as the terms of the trust deed are generally set in stone. If circumstances change or disputes arise among beneficiaries, it can be difficult and expensive to amend the trust deed.

Another potential disadvantage is the loss of ownership and control over assets once they’re transferred into the trust. The trustee has a legal duty to act in the best interests of all beneficiaries, which may not always align with the wishes of the person who established the trust.

When to consider setting up a family trust

So, when might setting up a family trust be a good idea? 

For some, they can be particularly useful for business owners who want to protect their personal assets from business liabilities. They can also be a good option for families with significant wealth who want to minimize tax liabilities and ensure that their assets are distributed fairly among multiple generations.

However, family trusts are not right for everyone. If you have relatively simple financial affairs and don’t have significant assets to protect, the costs and complexity of a family trust may outweigh the benefits. It’s important to seek professional advice from a qualified legal and financial advisor before making any decisions.

Ultimately, whether a family trust is a good idea for you will depend on your individual circumstances and goals. By weighing the pros and cons carefully and seeking expert guidance, you can make an informed decision that serves the best interests of your family and your finances.

If you are considering setting up a company trust, check out our in-depth guide that covers all you need to know about company trust and the company trust structure. 

Explore the benefits and drawbacks of a discretionary trust vs unit trust in our comprehensive guide to make an informed decision for your financial strategy.

Costs involved in setting up a family trust

As someone who has established multiple trusts over the years, I can tell you that the expenses can add up quickly if you’re not careful.

Trust establishment fees

The first cost you’ll encounter when setting up a family trust is the establishment fee. This covers the legal and administrative costs of drafting the trust deed, registering the trust with the relevant authorities, and setting up the initial trust bank account.

The cost of establishing a trust can vary widely depending on the complexity of your situation and the legal professional you choose. You can expect to pay anywhere from $1,000 to $5,000 or more for a comprehensive trust establishment package.

While it may be tempting to cut corners and opt for a cheap, off-the-shelf trust deed, a poorly drafted trust deed can lead to costly legal and tax problems down the road, so it’s worth investing in quality legal advice upfront.

Ongoing trustee fees

Once your family trust is up and running, you’ll need to factor in ongoing trustee fees. These fees compensate the trustee for their time and expertise in managing the trust’s assets and making distributions to beneficiaries.

Trustee fees can vary depending on the complexity of the trust and the level of service provided. Some trustees charge a flat annual fee, while others charge a percentage of the trust’s assets under management. Annual trustee fees can range from a few hundred dollars to several thousand dollars or more.

If you choose to appoint a professional trustee company, you can expect to pay higher fees than if you appoint an individual trustee. However, a professional trustee can provide valuable expertise and continuity, especially if you have complex financial affairs or want to ensure that your trust is managed properly after you’re gone.

Stamp duty considerations

Another cost to consider when setting up a family trust is stamp duty. In some Australian states, such as New South Wales, you may need to pay stamp duty when transferring assets into the trust.

The amount of stamp duty payable will depend on the value of the assets being transferred and the specific rules in your state or territory. In NSW, for example, stamp duty is charged at a rate of $500 plus 0.4% of the value of the assets being transferred, up to a maximum of $500,000.

Stamp duty can be a significant expense, especially if you’re transferring high-value assets like real estate or shares. However, there are some exemptions and concessions available in certain circumstances, such as when transferring assets between spouses or as part of a business restructure.

To navigate the complexities of stamp duty and ensure that you’re paying the right amount, it’s important to seek advice from a qualified tax professional or lawyer who specializes in trusts. They can help you structure your trust in a way that minimizes your stamp duty liabilities while still achieving your financial goals. Of course. we’d recommend talking to the team at Sleek about setting up a family trust, as we can offer tailored advice and practical assistance to get things arranged, from planning through to completion. 

Summing it up….

Setting up a family trust can be a significant financial investment, with costs ranging from establishment fees to ongoing trustee fees and stamp duty. However, for many families and businesses, the long-term benefits of asset protection, tax planning, and succession planning can far outweigh the upfront costs. By working with a qualified legal and financial team and carefully considering your options, you can establish a family trust that serves your needs and helps you achieve your financial goals for generations to come.

Remember, the key to success lies in choosing the right trustee, crafting a comprehensive trust deed, and staying on top of your legal and tax obligations. With a little know-how and the right professional advice, you can master the art of setting up a family trust in Australia and enjoy the peace of mind that comes with knowing your family’s future is in good hands.

Start your journey to financial security today and discover the power of family trusts by Sleek.