Family Trusts – What are they?
As experienced family lawyers, we often get asked about family trusts and setting them up. There are many types of trusts and the word “trust” is often used in different contexts, resulting in understandable confusion.
A trust is simply a relationship that exists where one party (legal owner or “trustee”) holds property (real estate, money, investments etc.) for the benefit of another party or parties (the beneficial owners or “beneficiaries”).
A simple form of trust that many people are familiar with may be a bank account that mum and dad (legal owners on the bank account) hold for their young children who are the beneficial owners (beneficiaries). The legal owners of any trust property are referred to as the trustees.
The most common type of trust is the discretionary family trust. In those kinds of trusts, the trustee, which may be mum and dad, or possibly a company they control, acts as the trustees. The potential beneficiaries are listed in a document known as a ‘trust deed’ and may include mum and dad as well as their children, grandchildren, nieces, nephews, cousins, other companies etc
Why have a trust?
Trusts were originally established by the wealthy to avoid death duties and taxes and to protect assets for the family unit. Trusts survive today for similar reasons. Trusts are also used for income splitting and taxation benefits. They are useful in protecting your assets.
Families often operate business enterprise through family trusts. A common example may be the family farm. The farm business is typically owned by a discretionary family trust. As the trust is discretionary the trustees can direct or allocate the income of the farm business between all of the adult family members. In this way the income tax liability can be spread around and the tax burden can be minimized.
Whilst tax considerations are important to the trustees in determining who to distribute the income to each year, other factors that are also taken into account when considering beneficiaries and their entitlements might generally include:
-Their ages
-Financial needs
-Special needs (such as physical or intellectual disabilities)
-Medical problems
-Relationship risks such as the divorce or separation of a beneficiary
-Centrelink benefits
-Individual risks such as addiction etc
It is important to recognise that whilst most family trust deeds allow distribution to a wide range of potential beneficiaries, unless the trust deed specifies otherwise, the beneficiaries do not have any set entitlements to trust funds and only have a right to be considered by the trustee when distributions are made.
It is the discretionary nature of the trust relationship which gives the beneficiaries asset protection. Let’s put this into perspective; John and Julie are the trustees of the Davis Family Trust. The trust owns its farm in Penola, South Australia. Under the trust deed, the beneficiaries are wide and include John and Julie (it is possible to be both a trustee and also a beneficiary provided that the trustee is not the only beneficiary) and their three children Jim, Philip, and Patrick.
Patrick aged 30 left the farm when he was 17 years old to become a business entrepreneur. He still receives a distribution from the trust each year as a gesture of goodwill from his parents. Patrick’s enterprises do not succeed and he goes broke. Before long he declares bankruptcy. Patrick’s creditors look at his assets and decide that, as Patrick has no ownership of the trust assets, it would be a pointless exercise to attempt to recover anything from him. Patrick is merely a potential beneficiary and the assets are protected.
A good outcome for the family!
Who are the parties to a family trust?
Settlor: this is the person who initially establishes the trust by signing a trust deed and does not derive any benefit from it
-Trustee: the trustee is the legal owner of the trust property and controls the operation of the trust
-Beneficiaries: the people who can derive some benefit under the trust
-Appointor: this is the person who has the power to change the trustees of the trust
Family trusts are very effective tools for passing wealth on from generation to generation. In South Australia, unlike other states, trusts can continue in existence forever.
‘Should I have one?’
The answer to this question depends very much on your personal circumstances and desires. In certain circumstances, however, trusts are a very simple, low-cost, tax-effective and user-friendly way of holding assets.
If you think you may be interested in setting up a trust or simply want to explore your options and get some personalized advice, call Donlan Lawyers to discuss on 08 8344 6422!