Everybody has a routine that they stick to throughout their lives. They put in their time at school, graduate with the necessary credentials, secure gainful employment, pay their fair share of taxes, and establish a family life. Many people choose this period to strengthen their financial security by making investments or launching new businesses.
Either you or a third party, such as a family trust, can legally claim ownership of the money and property. This could save you money in the long run by making it easier to file your taxes, protecting your assets, and getting you tax breaks.
In this article, you will learn how to set up a family trust, why you would use one, and the pros and cons.
What Are Family Trusts, Exactly?
In Australia, a family member can set up a discretionary trust to handle the money and property of the family. It’s also a standard framework for family-run enterprises. In a legal arrangement called a trust, one person (the trustee) holds legal title to the property for the benefit of other people (the beneficiaries).
The trustee has a lot of freedom to decide what to do with the property, and the beneficiaries get the money made by the investments.
One variety of trusts is a discretionary trust. The trustee of a discretionary trust has the authority to decide whether or not to make distributions to the beneficiaries and, if so, how much to give to each. The beneficiaries are only entitled to a reasonable expectation of payment, not a guaranteed payout.
The beneficiaries of a family trust are typically members of the same family, and the trustee is typically a family member or a firm controlled by the family. This trustee has wide latitude to make decisions, including how the trust’s revenue should be distributed. Therefore, a family trust can be a helpful tool for asset protection, reduced tax liability, and reduced vulnerability.
What Are The Benefits Of Trust In Australia?
A family trust is a common way for a family to build and manage wealth because it protects assets, helps plan taxes, gives a discount on capital gains taxes, and lets losses be carried forward. Many people establish family trusts because of their benefits.
Benefits of family trusts include:
Asset Security
By setting up a trust, a family can protect its assets from possible lawsuits. When a debtor doesn’t pay as agreed, the creditor may go to court to take the debtor’s property and sell it to pay off the debt.
Personal assets are things like real estate, cars, and other things that an individual owns outright. Therefore, the beneficiaries’ creditors are unable to seize them. If a beneficiary becomes bankrupt, this still stands.
Planning For Taxes
A trust established within a family unit is subject to a maximum income tax rate of 45%. Trust income that is given to beneficiaries, however, is subject to taxation at the beneficiary’s individual income tax rate.
As a general rule, a family trust can help reduce the family’s taxable income by a significant amount. Most of the time, the trustee of a family trust gives more money to the beneficiary with the lowest effective tax rate when dividing up the income from the trust. As a result, fewer taxes will need to be collected from the trust’s benefactors.
Property Investment Flexibility
When real estate is held in a trust instead of a traditional retirement account, there are more ways to invest in it. The beneficiaries of a trust do not share in any losses. This ensures that the trust’s beneficiaries will not be asked to make up for any financial shortfall. As an alternative, annual losses might be rolled over to the next year.
Capital Gains Tax (CGT)
When it comes to taxes on capital gains, trusts set up by a family are better than corporations. This is because corporations don’t have to pay the 50% discount that trusts do when they make capital gains on assets they have owned for at least a year.
A capital gains tax is payable on any profits you make from the sale of an asset. A family trust can get a 50% discount on capital gains tax for any profit made from selling any assets the trust has held for more than 12 months.
Family Trust Disadvantages
Business Growth
For the same reasons given above, some families choose to organize their enterprises within a trust. The fact that this structure makes it hard for a company to grow is a small price to pay for the benefits listed above. Trustee distribution of trust income is almost always required because of the hefty tax on undistributed trust income.
Consequently, the company will not be able to save any money to use as capital in the next few years. Banks and other lenders are wary of trusts because they are less transparent than other business entities like corporations.
Family Conflicts
Family strife is parred for the course. When a large amount of family wealth is held in trust, disagreements may arise over who should be in charge of the trust. If the trust deed doesn’t say how the trust’s income is to be split or how the trustee is to be chosen or replaced, family members are more likely to disagree.
It is important for the trust deed to outline the steps that will be taken in the event of a dispute so that there is no ambiguity.
Trustee Liability
With the help of a family trust, the beneficiaries’ assets can be kept safe from creditors, and their tax bills can be kept as low as possible. A trustee, however, is personally responsible for the trust’s debts and other duties. If the trustee is a natural person, this poses a serious threat to that person. That’s why it’s common practice to have a corporation serve as a trustee.
How Does Family Trust Work?
In Australia, a family trust serves a function comparable to that of a bank account. The child’s bank account is technically theirs, but the parent has the final say over what happens with it. It’s the same principle behind a family trust.
To provide their children with financial security, parents often establish family trusts and name their children as beneficiaries.
How Much Is Family Trust Setup?
Setting up a family trust costs money, just like setting up any other kind of legal document. The initial investment can be around $2,500, and the yearly maintenance fees can be the same amount.
Because there are so many rules and regulations about family trusts, like meeting the criteria for asset protection and all the Australian Taxation Office registrations on ABNs and Tax File Numbers, costs like this are unavoidable.
Stamp duty is imposed in some jurisdictions on family trusts at varied rates:
- WA – Nil
- ACT – Nil
- NSW – $500 (due 3 months from the date of the deed).
- NT – $20 (60 days from the date of the deed)
- QLD – Nil
- SA – Nil
- TAS – $20 (due 3 months from the date of the deed)
- VIC: $200 (due 30 days from the date of the deed).
Trust Tax Rates For Families
Trustees of a family trust must pay income tax on any funds they get from the trust, in addition to the initial expenditures associated with establishing the trust. The net income of the trust is taxed by the adults and businesses that benefit from it at their tax rates.
Untaxed earnings must be reported and paid in full.
Whether the trustees choose to keep any of the income in the trust or not, the beneficiaries will be taxed at the highest marginal rate of 45% if the money is not distributed in full.
And then some beneficiaries aren’t Australian residents; trusts must withhold tax from distributions of income made to non-residents. The highest marginal tax rate, 45%, applies to taxes paid by a trustee for minor beneficiaries who get $1,308 or more. A high tax rate is put on trusts that give money to minors. This is done to discourage people from building trust.
What Threats Exist To Trust?
One of the main problems with a family trust is that it can’t pass on capital or income losses to beneficiaries. Therefore, if a trust has a net loss, the beneficiaries cannot deduct that amount from their other assessable income.
Other potential dangers and drawbacks of establishing a family trust include:
- Threats to one’s finances due to taxes.
Trying to avoid paying taxes can be a good way to make money, but you should talk to a tax expert first to make sure you don’t get in trouble with the law.
- The legal owner’s name.
The trustee’s name will be on all official paperwork because he or she is the true owner.
- The end of asset ownership.
When assets are held in trust rather than by the individual, individual ownership is lost.
- Extra paperwork.
Short-term gains come with a high price tag in the long run.
When dealing with legal documents or tax advice, it is always important to talk to a professional to fully understand how your situation works.
Conclusion
In Australia, a family trust serves a function comparable to that of a bank account. The child’s bank account is technically theirs, but the parent has the final say over what happens with it. It’s the same principle behind a family trust. To provide their children with financial security, parents often establish family trusts and name their children as beneficiaries.
To know more, click and register your family, discretionary, or unit trust through Company123. We offer a professional trust registration service that was written by a commercial lawyer with over 30 years of legal experience.