Family trusts are widely used in Australia for tax advantages, asset protection, and estate planning. However, the tax implications can be complex. This article explains what family trusts are, how they work, and their benefits.
What is a family trust?
Family trusts, also known as discretionary trusts, are popular because they offer flexibility. Trustees can decide the percentage of income distributed to each beneficiary, which makes them an attractive option for securing family assets. Let’s explore how family trusts can support your goals, including tax efficiency, asset protection, and estate planning.
Tax benefits of family trusts
Income splitting and tax efficiency
One of the primary tax advantages of family trusts is income splitting. Income generated by the trust from business activities or investments can be distributed to family members in lower tax brackets (such as spouses, children, or grandchildren), which can reduce the overall tax burden.
Typically, income within the trust itself is not taxed directly. Instead, it’s distributed to beneficiaries, who are taxed at their personal rates. Beneficiaries do not have fixed entitlements, allowing trustees to allocate income in a tax-effective way each year.
Situations when a family trust needs to pay tax on its income
While family trusts offer tax benefits, trustees sometimes need to pay tax on trust income in specific situations, including:
- Non-resident beneficiaries: If income is distributed to a non-Australian resident beneficiary, the trustee must pay tax on their behalf.
- Minor beneficiaries: Distributions to beneficiaries under 18 that exceed $1,308 are taxed at the top marginal rate of 45%.
- Undistributed income: If income isn’t fully distributed, either intentionally or by oversight, the trustee must pay tax on it at the top marginal rate of 45%. To avoid this, trustees usually aim to distribute all net income.
Additionally, any distributions to individuals outside the designated beneficiaries are subject to the family trust distribution tax (FTDT) of 47%.
Capital gains tax benefits
When family trusts sell assets at a profit, they are subject to Capital Gains Tax (CGT). However, trusts receive a 50% CGT discount on profits from assets held for over 12 months. This discount makes family trusts an effective tool for preserving wealth across generations.
Family trusts and asset protection
Asset protection is another key benefit of family trusts. Since beneficiaries do not directly own the trust’s assets, these assets are often protected if a beneficiary faces financial challenges, such as bankruptcy or debt collection through court orders.
To maximise asset protection, trustees should consider any debts the trust owes to family members, as creditors may sometimes access these assets for debt recovery.
Estate planning benefits of family trusts
Family trusts can facilitate the smooth, tax-effective transfer of wealth from one generation to the next. Trustees retain control over family assets, allowing them to specify conditions and timing for asset distribution, instead of transferring ownership outright to individual beneficiaries.
By enabling efficient management, protection, and the transfer of assets, family trusts are a valuable tool for passing on wealth while minimising tax liabilities.
Seeking advice on family trusts
Navigating the complexities of family trusts requires expertise. Financial Spectrum’s experienced financial planners and accountants can guide you in maximising wealth and protecting assets for future generations. Book a free, no-obligation meeting with one of our experts today.
Rebecca is passionate about promoting the positive impact of quality financial advice on personal wellbeing. Read her full bio here.
