Advantages and disadvantages of a Family Trust

There are many ways to build and protect wealth in Australia; through different types of assets, but also through different types of structures.

A family trust is one such structure that is commonly used, but perhaps not quite as well understood. Whilst they afford many benefits, family trusts are risky and costly when used incorrectly.

The Australian Tax Office estimates that there were over 800,000 family trusts operating in Australia in 2023; this figure is likely to have only increased since.

This article will discuss the benefits and drawbacks of family trusts to help you understand how they function.

What is a Family Trust?

A trust is not a company or an entity; instead, it is a legal relationship between entities (i.e. person(s), companies etc.).

A trust is created when a settlor transfers assets (‘the trust fund’) to a trustee. The trustee then holds the trust fund on behalf of a beneficiary(s). The trustee has a duty to act in the best interests of all the beneficiaries when managing the trust fund. This means that the trustee must invest wisely and follow any instructions that have been laid out by the settlor. An appointor is the person who retains the power to dismiss and appoint a trustee, and therefore they usually have the ultimate control of the trust. The rules of the trust, as well as the initial roles of trustee, settlor, beneficiary and appointor, are typically detailed within the trust deed.

There are many different types of trusts. A family trust is a type of discretionary trust, which typically means that the trustee has the discretion of whom to distribute income and capital. By using the term ‘family’, typically the class of beneficiaries are family members of the primary beneficiary.

Benefits of a Family Trust

Naturally, there are many benefits to a family trust that people find attractive and useful to build and protect their wealth.

Asset protection

Given that the assets of a family trust are not personally owned by any one person, it is more difficult for third parties to lay claim to trust assets should issues arise. For example, if one of the beneficiaries was to be sued or became bankrupt, the creditor would then be tasked with proving that the assets of the family trust should be available to settle their claim.

At this point, the way in which the family trust operates would be examined. If at arms length, with a corporate trustee, income shared between a variety of beneficiaries, then this may make the creditor’s claim more difficult.

Another example is which a family trust trades as a business. Should that trading family trust be sued, once again the personal assets of the appointor and beneficiaries are entirely separate to the trading family trust. The creditor’s claim is all the more difficult to satisfy.

One circumstance where things are different, however, is following the breakdown of a relationship or marriage. Here, the Court is able to look more deeply at the family trust and its operations. A Court may decide that it is an asset of one of the parties; or, it may instead consider it to be a financial resource available to one of the parties [Caldwell v Caldwell].

Regardless, it is important to remember that there are no guarantees of asset protection by using a family trust; instead, the utility lies within adding layers of protection.

Privacy

Given that the trustee is the legal owner of the assets of the trust (though not the beneficial owner), a degree of privacy can be provided by this structure, particularly should a corporate trustee be used.

Estate planning

Family trusts can be effective structures to pass on wealth, given that the assets of the family trust are not subject to a person’s will following their death.

Trust deeds will typically outline the succession of roles such as the appointor, and trustee, which can streamline the continuity of assets in a much more efficient way than a will. Alternatively, it can assist with controlling assets, such as a circumstance where an appointor wants certain beneficiaries to continue to receive income, but not to have control of the assets themselves after the appointor’s death.

Drawbacks of a Family Trust

These assets are not covered by a will, so if you want a beneficiary of your will to receive a certain property, it can be complex, such a trust does not get the benefit of the land tax threshold for property.

Upfront and ongoing costs

The average cost to set up and operate a family trust within the first financial year is between $3,000 and $5,000. Then, on an annual basis, a family trust can be expected to have accounting costs of approximately $1,000 to $2,000.

Taxation limitations

In New South Wales, it is also important to exclude foreign persons from benefitting from a family trust which holds residential property, as significant surcharges and penalties can apply. This is a considerable barrier should the intent be for a family trust to hold residential property and include a foreign beneficiary,

Furthermore, family trusts typically receive less favorable assessments across the states and territories for land tax purposes.

Complexity

Generally, family trusts are very complex and require accountability and comprehension by the persons operating it. Otherwise, significant pitfalls are present, including surcharges, penalties, or even violations of state or federal legislation. They should not be used unless the structure, its benefits and downsides, and the potential consequences, are known and acknowledged.

Contact Turnbull Hill Lawyers

Building and protecting wealth to provide a better life for you and your loved ones is a long-standing goal of many Australians. There are many different ways to pursue this goal, through various assets and structures. One such structure, the Family Trust, involves complexity and risks but can nonetheless be very successful provided they are understood, used effectively and subject to expert legal and accounting advice.

If you believe that a family trust may be the right option for you, make an appointment with one of our lawyers.