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A family trust is usually set up by a member of the family, to benefit the rest of the members of that family. There are certain tax benefits that arise from the set up of a discretionary trust (which is the more “accurate” name for a family trust), providing the trust passes the various legal and taxation tests to determine its eligibility.

An additional benefit is that a family trust can protect the family’s assets from any liabilities of a member of that family (for example, if someone has to declare bankrupt or insolvent, etc.).

Also, a family trust allows you to pass the assets of the family onto future generations, while still giving them the taxation benefits they want.

Lastly, a trust can help bypass any sticky issues that might crop up should there be a death of a senior family member. It’s difficult to challenge a will in this sort of situation, which is always attractive to the person or persons who set up the trust in the beginning.

When setting up a family trust, certain roles need to be assigned:

A settlor has the role of giving the assets of the trust to the trustee. This is said to be “executing the trust” and usually finishes the settlor’s role in the trust.

A trustee is responsible for the trust and its assets. They have broad powers to conduct the trust, and manage its assets.

In a typical family trust, the trustees are usually the mother and father (or a company of which the parents are the shareholders and directors). Their children and any other dependants are usually listed as beneficiaries.

One of the major benefits of a family trust is that the trustee can distribute income earned by the trust however they wish, as long as the money/assets only go to people who are qualified beneficiaries. The trustee can vary this from year to year, as they see fit.

When it comes to income tax, a trust does not have to pay tax on any income given to the beneficiaries, however, it DOES have to pay tax on any income that was not given out. The beneficiaries pay tax on their own earnings from the trust.

This has the advantage of allowing the trustee to split the money up amongst the beneficiaries in such a way as to minimize the amount of tax each of them would pay individually.

This works  well  when a beneficiary is able to get income from the trust that does not push them over the tax-free threshold. The trust avoids paying tax by not distributing earnings, and the beneficiary gets income without having to pay personal income tax on it as  well .

Income received from a family trust is not considered a special form of income, but instead is part of a beneficiary’s taxable income. If the beneficiary earns money from other sources (such as a job, or additional investments) in addition to distributions from the trust, all of the income is taxed together.

Now that undistributed income from a trust is taxed at the top marginal rate of 45%, it has provided a strong incentive to fully distribute family trust income before the end of the financial year

One warning issued by the  Australian  Taxation Office (ATO) is for trustee/s to be careful with distributing earnings outside the family group of the trust. In this case, the individuals will be taxed at the top marginal taxation rate possible!

Always seek legal advice

The information on family trusts in this article should be considered general in nature, and in no way interpreted as legal advice. You should always get your own independent legal, accounting and financial advice before setting up any of these types of complicated legal structures.

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