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What is a family trust?

A ‘family trust’ can be set up by a family to tax effectively distribute income to specified members of the family. Like all trusts, a family trust must have trust property (assets), beneficiaries, a trust deed and a trustee. The latter may be individuals, or may be a company controlled by the person who set up the trust. This person is also called the settlor, which means the person who established or ‘settled’ the trust.

Of course, as is the case with any sort of trust (being a complex legal structure) it’s strongly recommended to get the assistance of a lawyer.

1. What a family trust is used for

The usual purpose of a family trust is income tax minimisation, enabling the income from the trust to be distributed to family members (beneficiaries) on low marginal tax rates. Usually, these trusts are established as ‘discretionary family trusts’, which refers to the ability of the trustee to distribute income at his/her discretion, depending on the beneficiaries’ personal tax position.   

A family trust may also be used in estate planning, as a way to pass on assets through generations of a family. It may also ease disputes and challenges that may arise from the use of a will. 

2. Distributing assets and income

The trustee is required to distribute the assets and the income of the trust according to the rules outlined in the trust deed by the person who set up the trust (the “settlor”).

As is the case with any type of trust, distributions of the trust income and/or property can only be made to people who, under the terms of the trust deed, are named as (discretionary) beneficiaries of the trust.

3. Be aware of the tax rules

Due to their principal purpose of tax minimisation, the use of family trusts is usually closely monitored by the Australian Taxation Office. So it’s very important that your tax adviser is across the complex laws that control their operation.

Typically, a family discretionary trust is part of a more complex family structure, in which a business is operated by a unit trust, and the units are held by the trustees of two or more family discretionary trusts. Therefore, the accounting can be tricky!

4. Do your research

It is important before starting a trust that you get all the information you need. Trusts are complex, costly to administer, and limited in their use if not used carefully. If you don’t understand the legal jargon and the tax consequences of trusts, ask your adviser to demonstrate how they work before you commit to establishing one. Read as much as you can about these structures and seek independent legal, accounting or financial advice.

Your accountant or financial planner may be able to help you find a lawyer who can give you assistance when it comes to establishing a family trust.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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Published on: Monday, January 17, 2011

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