Family Trust Benefits Explained: Why More Australians Are Choosing Trust Structures

Tax Advantages: Maximising Wealth Preservation

Family trusts offer several tax benefits that help families manage their tax obligations and grow their wealth over time.

Strategic Income Distribution

A discretionary trust, like a family trust, excels at optimising tax outcomes through income distributions. Trustees can distribute income to beneficiaries in lower tax brackets, potentially reducing the household’s overall income tax. For example, a beneficiary receiving income who is in a lower marginal rate may pay less tax on their share of the trust income than if it were all taxed at the highest rate. This approach becomes particularly valuable when managing capital gains, as the 50% capital gains tax discount can be applied when trust assets are held longer than 12 months.

Capital Gains and Franking Credit Management

Trust structures allow families to direct capital gains to beneficiaries with unused tax-free thresholds or lower marginal rates. Similarly, franking credits from share dividends can be distributed to individuals who benefit most from these offsets. The Australian Taxation Office (ATO) permits these strategies provided trusts comply with family trust election (FTE) requirements and holding period rules. The family control test and proper trust deeds help ensure these tax concessions are available.

Business Succession and Loss Management

For family businesses, trusts provide mechanisms to carry forward a tax loss under modified income injection tests. This concession helps businesses recover from tough periods without sacrificing future growth potential. The ability to hold business assets within the trust structure also offers flexibility for succession planning and ongoing management.

Asset Protection: Shielding Wealth from Risks

Family trusts are a popular way to protect assets from legal action and other risks.

Creditor and Legal Safeguards

Assets held in trusts generally fall outside personal bankruptcy proceedings. Many Australian businesses use protective structures like family trusts to isolate personal wealth from business risks. This separation proves vital for professionals in high-liability fields and business owners facing market volatility. The trustee company, as the legal owner of trust property, can help protect assets from creditors, provided the trust is set up correctly.

Relationship Breakdown Mitigation

Family trusts can limit asset exposure during divorces or separations. While courts may consider trust distributions in property settlements, properly structured trusts with a corporate trustee and clear trust deeds demonstrate stronger asset separation than personal ownership models. This can help ensure family assets are preserved for future generations.

Estate Planning: Bridging Generational Wealth Gaps

Family trusts play a key role in estate planning, helping families manage the transfer of wealth.

Controlled Wealth Transfer

Trusts bypass probate delays and public disclosure, allowing seamless asset transitions. Trust assets can be distributed to the next generation according to the terms of the family trust deed, without the need for a legal personal representative to manage the process. Testamentary trusts, created through a will, can also be used in conjunction with family trusts to further protect assets and provide for nominated beneficiaries.

Minimising Family Disputes

Clear trust deeds reduce conflict risks by specifying distribution rules. Trusts help ensure that income and capital are distributed to the beneficiaries as intended, which can minimise disputes among family members and general beneficiaries.

Flexibility in Changing Circumstances

Family trusts offer flexibility to adapt to changing needs and circumstances.

Adaptable Beneficiary Classes

Modern family trust deeds often include broad beneficiary definitions, accommodating new in-laws, future grandchildren, and even charitable causes. This flexibility ensures relevance across decades without requiring legal amendments. The ability to add other beneficiaries or general beneficiaries allows the trust to respond to changes in the family group.

Business Structuring Versatility

Family trusts can hold property, shares, or entire trading entities. Many medium-sized trusts hold business assets, leveraging tax efficiencies unavailable to sole traders. The trust can open a bank account, receive government grants, and manage business operations as a legal entity.

Key Considerations Before Establishing a Trust

There are important practical factors to consider before setting up a family trust.

Setup and Maintenance Costs

Initial establishment costs can include stamp duty, depending on the relevant state, and fees for preparing the trust deed and appointing a corporate trustee. Ongoing costs include accounting fees for annual tax returns and compliance with state revenue office requirements. While these costs can be significant, they are often offset by the tax advantages and asset protection benefits.

Compliance Requirements

Trustees must lodge annual tax returns and pay tax on any undistributed income at the highest tax rate. Distributions must be made before the end of the financial year to ensure income is properly distributed to the beneficiaries and included in each beneficiary’s assessable income. The ATO’s increased scrutiny under Section 100A means families should document all income distributions thoroughly to avoid disputes. The trust must also comply with the family trust election and family control test to access certain tax concessions.

Long-Term Commitment

Most trusts have a vesting date of up to 80 years, making them unsuitable for short-term goals. Families should align trust creation with multi-decade objectives like education funding or retirement planning. The settled sum, which is the initial amount used to establish the trust, is held by the trustee for the benefit of the trust’s beneficiaries over the life of the trust.

Who Benefits Most from Family Trusts?

Family trusts are suitable for a wide range of Australians:

• Business owners who want to protect business assets and manage tax obligations.

• Property investors looking to hold property and access capital gains tax discounts.

• High-income professionals seeking asset protection and tax planning benefits.

• Blended families wanting to ensure fair distribution of family assets to future generations.

Conclusion: Building a Legacy Through Strategic Planning

Family trusts can help Australian families manage and pass on their assets. These trusts can offer some tax benefits and help with planning for the future. To work well, they need to be set up correctly and managed according to rules set by the Australian Taxation Office and local authorities.

Because the rules around trusts can be complicated, it is important to get clear advice. At ACT Tax Group, we help families set up and manage trusts in a way that meets both legal requirements and family needs. Whether you are protecting your home or planning for a business, we aim to make sure your trust works as intended.