To Family Trust or Not?

To Family Trust or Not?

A family trust is a method of holding assets such as property whereby usually a person (trustee) holds those assets for the benefit of members of a family (beneficiaries).

It represents an obligation by that trustee to hold assets and distribute income derived from those assets to family members. In this sense, it is a discretionary trust where there is no predetermined obligation on the trustee to perhaps distribute the income in the same proportion as in previous years.

A family trust is a legal way of providing protection for your assets from potential liability claims against family members. It serves a purpose for estate planning such as ensuring that asset distributions are done according to a will from a deceased family member. A family trust may also be seen as a way of retaining assets for future generations. It may also borrow money for investment purposes where these assets are held in trust for the family members.

Generally, tax advantages of a family trust are a key reason why a family may wish to establish a trust. Usually, self-employed people and businesses will seek to take up these tax advantages, as opposed to PAYG employees who may not have the ability to determine their tax structures.

A trust does not need to pay tax provided all the trust income is distributed to the beneficiaries.  At the time of this publication The Australian Taxation Office has determined that any part of trust income not distributed will result in the trustee being subjected to tax at the top marginal rate (45c for each dollar) for that amount. Income distributed to beneficiaries forms part of their assessable income and subject to income tax at marginal rates. However, given the current tax rates which allows for the first $18200 of income to be tax free, this may represent an effective way to minimise tax by distributing income to family members.

This is in contrast to paying tax at marginal rates which both mum and dad would otherwise be subjected to.

Accountants and tax lawyers are the starting point for most people to seek advice about the suitability of deciding whether establishing a family trust will be good for them. You should ensure that all the rules and requirements are fully explained to you before you make a decision on whether to proceed with creating a family trust.

Not all lenders are made equal when it comes to lending to a trust. BFG do not give legal advice and this article general in nature, but recommend you do seek advice prior to entering into this arrangement. We are here to support you with any questions on this type of lending structure and available for a confidential no obligation chat about your trust lending needs and goals.