Article By: Sarah Cappello Cappello Rowe Lawyers Sydney

Family trusts are exceptionally common type of trust with close to a million family trusts estimated to be in use in Australia. They are generally used to hold assets or run a family business, for the benefit of a family group.

A inter vivos discretionary trust is established by someone during their lifetime to manage certain assets or investments and support specific beneficiaries, such as for a family trust your family members.

There are certain advantages and disadvantages of family trusts, for example, if you are holding assets in a family trust, you cannot leave them to a specific beneficiary in your Will. There are also additional compliance burdens and costs (such as tax returns and other filings) associated with the trust to set up and manage the trust during its life time.

Who is included as “family”?

Within a family trust, the beneficiaries are generally related and may include family companies, other family trusts and even self-managed superannuation funds. Registered charities may also be beneficiaries.

The parties to the trust are determined by the primary beneficiary – the person whose family group is able to be included as potential beneficiaries of the trust.

That person’s family may be defined differently depending on the trust deed but will generally include:

1. The primary beneficiary (the named person(s) in the Deed)
2. The Spouse of the primary beneficiary
3. The parents and grandparents of the primary beneficiary
4. The parents and grandparents of the spouse of the primary beneficiary
5. Any siblings of the primary beneficiary and the spouse of the primary beneficiary
6. Any children of any of the above (children, nieces, nephews etc of the Primary Beneficiary and their spouse)
7. Any lineal descendants of the above (i.e. grandchildren).

This casts a very wide net, and allows the trustee a great deal of discretion about who to included as a beneficiary each year.

Advantages

There are three main advantages of family trusts:

• Asset protection
• Protecting vulnerable family members
• Tax benefits.

Asset protection

Discretionary trusts are popular structures for protecting assets from bankruptcy or business failure.

The assets of the trust don’t belong to the individual beneficiaries they cannot generally be used to pay the creditors of individual beneficiaries (though there are some measures which can override this if they assets were moved into the trust specifically to defeat a claim over those assets).

They may also be used for protecting family assets from marriage breakdowns. In the event of a family law property settlement, a family trust may have a higher likelihood of being excluded from a settlement than assets held directly by an individual (though again care should be taken as certain claims can override this).

Any assets held in the family trust will not form part of a deceased estate, though any specific powers to the trust should be dealt with as part of the Will.

Protecting vulnerable family members

Family trusts can be beneficial for protecting vulnerable beneficiaries while still allowing for provision for income for those individuals where that person may be incapable (or is in some way untrustworthy) of managing their financial affairs.

Income may be streamed for the benefit of those individuals without allowing them access to or control over the underlying assets that generate that income.

Tax Benefits

Family trusts may also provide tax benefits to enable the family group to manage the tax of the family unit. The discretionary nature of the trust allows the trustee to chose which beneficiaries are allocated any income or capital from the trust each income year (including other family entities and any charities).

As such, instead of any one individual being attributed all of the income of the trust it can be allocated to those members of the family group who, for example:

• May be liable for lower rates of tax (i.e. a family superannuation fund or family company)
• Otherwise would not have any income (allowing access to lower marginal tax rates)
• Has losses or capital losses that may be offset against the income or capital gains of the trust.

This can be particularly helpful in supporting adult children who are studying or older parents who are retired as they are likely to be in a low tax bracket. It can also allow for greater amounts of the wealth generated by the trust to be retained within the family group by insuring it is allocated most efficiently across the group.

Disadvantages

Family trusts aren’t without their disadvantages however, these may include:

• Any income earned by the trust that is not distributed correctly to a member of the family group is taxed at the top marginal tax rate in the hands of the trustee
• Distributions to minor children are taxed at up to a penalty rate of 66% to stop the streaming of income to minors above a very low threshold (currently $416 per year)
• The trust cannot allocate tax or capital losses to beneficiaries, and they are retained by the trust to offset against future income
• There are costs involved for establishing and maintaining the trust, and annual compliance obligations
• Running the trust can become particularly difficult when family disputes arise, and can be difficult to unwind if the decision is made to settle (end) the trust arrangement
• The powers provided under the trust (particularly the “power of appointment” and any trustee powers) should be provided for in the Wills of the holders or the Trust Deed to ensure there are no disputes over who has power over the trust if a current holder of those powers is deceased.
• A Family Trust Election must be filed with the Australian Taxation Office, otherwise many of the benefits of the trust will be lost.

Other considerations

If you are considering setting up a family trust there are several issues that should be carefully considered (and discussed with your advisors – specifically your accountant and/or solicitor):

• Who will hold the powers over the trust (it may be one or more people), particularly the power to appoint and remove trustees (the “power of appointment”) as that person has the ultimate control over the trust relationship?
• Who should those powers pass to if the initial holders become incapacitated or dies?
• What classes of beneficiaries should be included or excluded? (This is particularly important if the trust will hold land in certain States, as some states required that non-Australian residents cannot be beneficiaries of trusts holding real estate).
• Who should be the trustee (this can be an individual or a company)? Often a new company will be established to provide further asset protection between the assets and the individuals running the trust, however this will also include further costs and compliance burdens that must be managed.
• What will the trust be used for (what assets will it hold) and how will they be financed?

Cappello Rowe would be happy to have a discussion with you, if you are considering setting up a Family Trust, or are looking at strategies to manage and protect your families wealth and investments. We can also assist with the ongoing management of any trust structures and planning for succession of these structures to future generations.

If you would like more information on protecting trade marks or need some advice, please contact us on 02 8325 1520 or email info@cappellorowe.com.au