Family Trusts

March 12th, 2021

Family Trusts

Family Trusts are used for holding assets or for running family-based businesses. It is referred to as “inter vivos discretionary Trust” which means that an individual establishes a family Trust throughout their lifetime to maintain or manage investments, assets and to support beneficiaries including the family members of the individual.

There are several advantages to having a family Trust, they are beneficial for protecting the assets from going bankrupt or from business failures. The Trustees own the assets in the Trust instead of the beneficiaries therefore, they cannot be utilised to pay off creditors of the beneficiaries, unless they were invested in the Trust with the intention of paying off the creditors.

They are also beneficial to protect the family assets in context of divorces and marriage breakdowns. When an event involves property settlement in terms of law of a family, the assets that are invested in the family Trust fund are likely to be excluded from the property settlement than the assets which are directly held by the individual. Family Trusts can also ensure that challenges of Will are avoided considering any of the assets in the Trust will not be considered as part of the deceased’s estate. It can also be considered as a motivator to retain assets within a family group for a family business, example a family farm. In a Trust that is fully discretionary, the Trustee makes the decision of who gets to access the Trust assets and is responsible for splitting the assets. In Australia, the Family Law Courts considers the Trust assets owned by the Trusts that are discretionary and the spouses are the beneficiaries, as sources of finance and include this into their judgments regarding splitting the assets during divorce.

In Australia, most of the working individuals aim to live a comfortable retired life which is natural. Almost all Australian working individuals create their retirement funds through superannuation, the discretionary Trust plays can play an efficient role in supplementing this earning. The Trust does not have limits to contribution unlike the funds of superannuation. They do not even have any restrictions on where the funds are invested, neither do have any limits to borrowing. Throughout one’s life, they can flexibly give and take from the Trust as they deem necessary which enables an increased financial flexibility.

A large number of Australian businesses run on discretionary Trusts, especially when they are family businesses. The beneficiaries of this Trusts include the immediate or extended family of the individual. The beneficiaries do not hold any interest or rights in the property or assets of the Trust unless the Trustee distributes the assets as they see fit to the beneficiaries.

Tax Purposes can also be a reason Trusts are advantageous when the Trustees have a higher tax bracket, and the beneficiaries fall under a lower one. The effective distribution income to beneficiaries through marginal rates that are low will result in a low amount of tax payment.

If you would like to know more, please contact us.