Should you consider a family trust?

Family trusts can be a good way to protect your family’s assets and ensure smooth succession planning. But be warned: they’re not for everyone.

Family trusts are one way for families with significant cash assets to reduce their tax liabilities while ensuring a smooth distribution of wealth between family members.

There are more than 800,000 trusts in Australia with assets totaling more than $3 trillion, according to recent figures.

That said, with just over 0.4% of taxpayers accounting for 95% of all trust income, it’s fair to say that not many families choose to go down this route.

So why might you consider establishing a family trust?

First, let us explain what it is

In tax terms, a family trust is an entity that holds property and assets for the benefit of a nominated group of beneficiaries.

In this arrangement, the trustee is the person responsible for managing the trust’s affairs, including lodging tax returns and paying tax liabilities.

The trust beneficiaries are the individuals who receive a share of the trust’s net income – usually members of the family.

Unlike other types of estates and fund arrangements, a family trust is only legal for tax purposes if the trustee has made a valid Family Trust Election (FTE).

An FTE is an optional declaration made to the ATO to notify them that the trust should be a family trust for taxation purposes.

This can only be done when relevant tests are satisfied, including that income from the trust will only distributed to a nominated family group.

What are the benefits?

The principal reason people set up a family trust is to access tax concessions on family assets, ensuring beneficiaries receive the maximum amount of family wealth.

Additionally, family trusts can ensure beneficiaries receive a low-taxed income benefit over a long period of time, rather than a lump sum payment of cash.

Finally, family trusts are set up to protect the division of assets in the event of a divorce.

This can be particularly important for families that own farms or other income-generating assets that may be substantially devalued by being split.

What are the risks?

While there are many benefits of arranging your affairs into a family trust, they won’t suit every family.

You only have to take a quick look at the family trust dispute involving Gina Rinehart and her children to see that it can tear a family apart.

Additionally, because family trusts can be linked to tax minimisation, they’re often in the crosshairs of policymakers looking to close tax loopholes.

For example, Federal Labor Party recently committed to changing the tax requirements of family trusts, which would increase the tax obligations of trustees and beneficiaries.

Of course this doesn’t mean such changes will actually take place. The last attempt to tax family trusts was made by Peter Costello and John Howard in 2002, and it failed.

But it’s important to understand that the current favourable environment for trusts may change in future.

Still not sure?

Before setting up a family trust, it’s important to understand your risks and obligations.

To do this, we recommend you come and chat with us.

We can talk you through the benefits and potential pitfalls, as well as other great options for protecting your wealth and giving you peace of mind.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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