A Trusted Investment Vehicle

By Andrew Sherlock

Family trusts can be an effective investment structure to manage and protect your family’s wealth and you don’t have to be uber wealthy to benefit from having one.

For those with sufficient assets, a family trust can be an effective way to protect your family’s assets and limit your tax liability at the same time.

What is a family trust?

A family trust is what is known as a ‘discretionary trust’, where assets are placed in the care of a third party, the trustee, who manages it on behalf of the beneficiaries. Discretionary trusts are so named because the distribution each year of the income and capital gains earned by the trust to the beneficiaries is at the total discretion of the trustee. Beneficiaries are members of the trust and might include parents, children, other close relatives, and their spouses. A beneficiary may also be a company.

Key benefits

As mentioned, the key benefits of having a family trust are asset protection and tax minimisation. A trust provides protection from creditors in bankruptcy, but the contents of a trust can be included as part of the matrimonial pool when it comes to divorce.

All income of the trust, including realised capital gains, must be distributed each year. It is then included in the beneficiary’s assessable income and taxed at their personal tax rate.

As a result, a trust can work particularly well from a tax perspective, if you are on a high marginal tax rate but your beneficiaries are on low marginal rates. If all individual beneficiaries are on a marginal tax rate greater than the company tax rate, then a family trust may include a corporate beneficiary to reduce tax.

More flexibility

Another advantage of a family trust is that it offers a flexible, tax effective structure to accumulate wealth for retirement, alongside superannuation.

Their flexibility also makes them particularly attractive for small business owners who may run the business through a company structure but hold shares in that company in a family trust. The trust can then direct different types of income, such as rental income from your business premises, franked dividends from company profits or capital gains to different individuals.

A family trust can also help with succession, allowing you to pass control of the family trust to the next generation by changing the trustee, without triggering a tax event.

Some considerations

There is the loss of ownership as the trust now owns the asset, not you. Also, if the trust suffers an investment loss, those losses cannot be distributed to offset your personal tax liability but must remain inside the trust. There are also costs involved in setting up and managing the trust.

Setting up a trust

To set up a family trust you will need to consult a lawyer to create a trust deed. You will also need to do the following:

  • Appoint a trustee and determine your beneficiaries;
  • Decide which assets to include in the trust. For example, a wide range of assets including stocks, bonds, managed funds, cash, real estate, antiques and fine art can all be included; and
  • Apply for an ABN and a Tax file number (TFN) and open a bank account in the name of the trust.

There are set up costs and annual fees, as you need to file with the Australian Tax Office each year. Stamp duty applies in both NSW and Victoria on establishment, but not in other states.

What about testamentary trusts?

Another type of trust popular with families is a ‘testamentary trust’ which is created within your Will and does not come into effect until your death. Similar to family trusts, testamentary trusts have the advantage in estate planning of providing tax and asset protection benefits for the future. Family trusts are popular for good reason, but you need to make sure it is appropriate for your family’s circumstances. If you would like to know more, give us a call.

Contact us if you’d like to find out more about using family trusts and whether they are the right structure for you.

Andrew Sherlock is the Owner & Head of Advice at Sherlock Wealth. A Sydney based financial planning firm, Sherlock Wealth has been helping successful families, business owners and individuals with their wealth creation and wealth protection needs for more than two generations.

A Chartered Accountant with a background in funds management, Andrew’s career spans more than 30 years. Andrew was one of the first people in Australia to obtain the Self-Managed Superannuation Specialist accreditation and is one of only a few advisers in Australia to be a Certified Investment Management Analyst and a lifetime member of the international MDRT Top of the Table. He holds a BA Economics degree from Macquarie University with majors in accounting and finance.

Helping clients to achieve their lifestyle goals through smart financial planning, wealth structures and strategic advice, while providing peace of mind, are the cornerstones of Sherlock Wealth.  Andrew can be reached at ask@sherlockwealth.com.

Disclaimer: The information provided in this article is intended to provide general information only and the information has been prepared without taking into account any particular person’s objectives, financial situation or needs. Before acting on such information, you should consider the appropriateness of the information having regard to your personal objectives, financial situation or needs.

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