Family trusts and asset protection: a plain-language overview

What a family trust is

A trust is a legal arrangement under which a trustee holds and manages assets for beneficiaries. The trustee may be an individual or a company. In a discretionary trust, the trustee generally has discretion about distributions within the limits of the trust deed and the law; beneficiaries do not simply own a fixed share of each trust asset.

The deed identifies who can benefit and governs the trustee's powers. Setting up and administering a trust involves costs, record keeping and ongoing obligations. The Australian Government's trust structure guide explains these basic features.

“Family trust” can mean different things

Families often use that phrase for a discretionary trust. For tax purposes, however, the ATO explains that a family trust is one whose trustee has made a family trust election. The name alone is not enough.

An election may give access to particular tax concessions, but distributions outside the defined family group can attract family trust distribution tax. Changing or revoking an election is restricted. Do not assume that everyone described as family in everyday conversation belongs to the statutory family group. See the ATO's Family trusts guidance.

Asset protection is not a guarantee

A trust may help separate ownership and management of assets, but it is not a way to make assets immune from claims. The outcome depends on the deed, ownership, liabilities, control and the circumstances of any transaction. A trustee's obligations, security over assets and personal guarantees also need individual review.

Moving assets into a trust when financial trouble arises can be challenged. AFSA's guidance on property in bankruptcy identifies recovery provisions for undervalued transactions and transfers to defeat creditors under sections 120 and 121 of the Bankruptcy Act 1966. Their application depends on statutory conditions and the facts; there is no universal “safe” transfer period.

Do not assume a trust will exclude assets from consideration on relationship breakdown. Obtain family-law advice about the particular arrangement rather than relying on the trust's label.

Plan for control as well as ownership

Ask who can appoint or remove the trustee, who controls any corporate trustee, and what the deed provides if a key person dies or loses capacity. Review the deed and amendments alongside wills, powers of attorney and company records. Do not assume that a will alone transfers control of the trust or disposes of its assets.

Before establishing or changing a trust, ask your solicitor and tax adviser to review:

• The purpose of the structure and whether its ongoing cost is justified.
• Trustee duties, control, guarantees and exposure to creditors.
• Existing elections, proposed distributions and record-keeping requirements.
• Tax and duty consequences of transferring assets or changing arrangements.
• Succession arrangements and any separation or insolvency risks.

Before relying on this information

Tax rules and proposed reforms can change. Seek advice on the law actually in force for the relevant transaction and income year, not simply an announced proposal.

This article provides general information about Australian law, with a NSW focus where indicated. It is not legal or tax advice and does not take your circumstances into account. Obtain advice about your own situation before acting.