22nd July 2024
Are you considering setting up a family trust (or discretionary trust) in Australia but unsure where to begin? You’re in the right place! Establishing a family trust may not be as complex as it seems, provided you follow the correct steps. Here’s a succinct guide to help you understand what a family trust is and how to set one up.
What is a Trust?
A trust is a legal arrangement where one party (the trustee) holds property or assets for the benefit of another party (the beneficiaries). Trusts are often used to manage and protect assets, distribute property, and even as a business structure.
What is a Family Trust?
A family trust, also known as a discretionary trust, is created for the benefit of family members. The trustee has the discretion to decide how the trust’s income and assets are distributed among the beneficiaries. This flexibility can be advantageous for managing family assets and planning for future generations.
Family trusts are established for various reasons, including asset protection, estate and tax planning, and to manage family assets.
Different Types of Trusts
When considering a trust, it’s essential to understand the different types available:
- Discretionary Trusts: The trustee has full discretion on how to distribute income and assets among the beneficiaries. This type is commonly used for family trusts due to its flexibility.
- Fixed Trusts: Beneficiaries have a fixed entitlement to the income and assets of the trust. The trustee has no discretion in distributing the trust’s resources.
- Unit Trusts: Like fixed trusts, but the trust’s assets are divided into units, similar to shares in a company. Beneficiaries hold units that determine their entitlement.
- Bare Trusts: The trustee holds assets on behalf of the beneficiaries without any discretion. Beneficiaries are entitled to all the income and capital.
- Testamentary Trusts: Created by a Will and comes into effect upon the testator’s death. This type is often used to manage the inheritance for beneficiaries who are minors or require asset protection. In a testamentary trust, funds can be set to be accessible only once the beneficiary reaches a certain age, such as 18.
When setting up a family trust, consider the following:
- Choosing the right trustee: The trustee should be trustworthy, capable, and have a good understanding of managing trust assets.
- Defining beneficiaries: Clearly identify who will benefit from the trust to avoid disputes.
- Drafting a comprehensive trust deed: The trust deed should outline the trustee’s powers, beneficiaries’ rights, and the trust’s management procedures.
- Tax implications: Understand the tax obligations of the trust and how it affects both the trustee and beneficiaries.
Given the complexity of trust law, seeking professional legal advice is highly recommended to ensure the trust is set up correctly and serves its intended purpose. As this article is general advice, please speak to your accountant to learn how a family trust may affect tax obligations. By understanding these considerations and the types of trusts available, you can make an informed decision about whether a family trust is right for you.
At Castrikum Adams Legal we are highly experienced in all aspects of trust and estate planning. Our knowledgeable team is here to provide you with tailored legal solutions to meet your needs. For more information on Wills and Estate Planning, click here to read more of our insightful articles. Contact us today on (02) 6687 1167 for personalised advice and support.