What is a family trust and how does it protect assets?

Family trusts come up a lot in conversations about protecting assets and managing tax across a family, and they are widely used in Australia. They are also widely misunderstood. This guide explains what a family trust is, what it does well, and what it costs.

What a family trust is

A family trust, more precisely a discretionary trust, is a legal arrangement where a trustee holds assets for the benefit of a group of beneficiaries, usually a family. The people involved are the trustee, who controls and administers the trust, the beneficiaries, who can benefit from it, and the appointor, who has the power to appoint or remove the trustee and so holds ultimate control. The trust is governed by a document called the trust deed.

The word discretionary is the key. The trustee has discretion over how the income and capital are distributed among the beneficiaries, rather than each beneficiary having a fixed entitlement. That flexibility is the source of most of the trust's advantages.

Asset protection

One of the main reasons people use a family trust is asset protection. Because the assets are owned by the trustee for the beneficiaries, and no beneficiary has a fixed entitlement, the assets can be harder for a beneficiary's personal creditors to reach. This is why trusts feature so often in planning for business owners and others exposed to personal risk.

Two honest caveats we always give. First, asset protection is not absolute. A trust set up or used to defeat known creditors can be challenged, and control of the trust can itself be an issue in disputes, including family law. Second, protection depends on the trust being set up properly and run properly. A poorly run trust offers far less protection than people assume.

Tax flexibility

The other main attraction is flexibility in how income is distributed for tax purposes. Each year the trustee can decide how to distribute the trust's income among the beneficiaries, which can allow income to be directed in a tax-effective way across a family group.

This is genuinely useful, but it is also an area of real complexity and active regulator attention. Trust distributions have to be made correctly and on time, and the tax rules around them are detailed and have been the subject of recent ATO focus. We work with your accountant on this, because the tax outcome and the legal structure have to line up.

The costs and the obligations

A family trust is not free or effortless. There are set-up costs for the deed and the structure, often including a company to act as trustee, and ongoing costs for administration, accounting, and tax. The trustee carries real duties, and the annual distribution decisions must be made properly, documented, and on time.

The practical test we apply with clients is whether the trust earns its keep. For a family group with income to manage, a business to hold, or assets worth protecting, a trust often does. For a simple situation with little income and few assets, the cost and the administration can outweigh the benefit.

Is a family trust right for you

There is no universal answer. A family trust can be an excellent structure for the right situation, and an expensive complication for the wrong one. The decision depends on your assets, your income, your risk, and your family, and it should be made with both legal and accounting advice, because the two sides interact.

How we help

We advise on whether a family trust suits your situation, set up the trust and any corporate trustee properly, and make sure the deed does what you need, including who holds control through the appointor role. We work alongside your accountant so the structure and the tax position fit together. If you are weighing up a trust, speak to us and your accountant together, before you commit.

Frequently asked questions

What is the difference between a family trust and a discretionary trust? They usually mean the same thing. A family trust is a discretionary trust used for a family group, where the trustee has discretion over distributions.

Does a family trust protect my assets completely? No. It can make assets harder for a beneficiary's creditors to reach, but protection is not absolute and depends on the trust being set up and run properly.

Can a family trust reduce tax? It can allow income to be distributed across a family group in a tax-effective way, but the rules are complex and must be followed carefully. Get accounting advice.

Is a family trust worth the cost? It depends. For a family with income to manage or assets to protect, often yes. For a simple situation, the cost and admin may outweigh the benefit.

Keep reading

• Family trusts and asset protection
• Sole trader, company or trust: which structure is right?
• Family trust vs will: do you need both?

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.