Does establishing a family trust avoid tax? The short answer is no. The longer answer is a little more complex. A family trust will help optimise tax and provide a vehicle to minimise tax, and there is a difference between the two. Optimising tax is a proactive strategy. Minimising tax is a reactive process.
At First Financial, we help clients use structures like family trusts strategically, not to avoid tax, but to manage it effectively as part of a broader financial plan.
What is a family trust?
A family trust, also known as a ‘discretionary trust,’ is a legal agreement with an appointed trustee responsible for managing assets on behalf of family members, also referred to as ‘beneficiaries’. The trustee can be a person or a company that oversees how the trust’s income and capital are distributed to the beneficiaries.
A trust deed is established. It is a legal document outlining the rules and conditions that govern the trust. Once the trust deed is established, the trust can own property, operate a business, own shares, and distribute income to the beneficiaries.
Tax and other advantages of a family trust structure
A family trust generally doesn’t pay tax itself, the beneficiaries on the trust pay tax on the income they receive from the trust. A family trust is not the golden chariot to avoid tax, it does provide legal and legitimate tax optimisation and other benefits:
- The trustee can allocate and distribute income to beneficiaries in a lower tax bracket, helping a family better manage their tax obligations.
- Trust distributions may qualify for the 50% capital gains discount. This applies to an asset the trust has held for over 12 months and where the gain on sale is distributed to an individual. This includes:
- Property: residential, commercial, and vacant land
- Listed shares
- EFTs and units in managed funds
- The goodwill of a business
- Licenses, trademarks and IP
- Collectables over $500, such as art, coins, jewellery, etc
- Vehicles and boats that are not for personal use.
- Assets in a trust are typically protected from the creditors of individual family members. This can be very advantageous in family-owned and run businesses.
- Succession planning: A trust is an excellent tool to pass wealth across generations without transfer costs or capital gains tax.
A family trust structure can be ideal when you have a profitable business or hold assets and need a flexible income distribution model. They work well if you have adult children or family members in lower tax brackets and when asset protection or estate planning is a priority. is a priority.
What is the downside?
Considering if a family trust is the preferred structure for your circumstances, there are several considerations to be aware of.
- Set up and ongoing costs: Establishing a family trust will cost between $1500 and $3000 in legal and professional fees. At minimum, annual accounting, tax returns and trust resolutions will cost between $1000 and $2000 annually.
- Using a company as the trustee adds additional layers of complexity and costs.
- The trust must maintain accurate financial records.
- Only certain people can receive distributions.
- The ATO targets trusts. It will deny claims or demand amendments for poor documentation, or if it suspects false claims.
A family trust has its place
Family trusts are ideal structures for successful family-owned businesses with a large portfolio of assets. They offer a framework for a long-term tax optimisation strategy and can help with tax minimisation. Their superpower is protecting assets, estate and succession planning.
Keep in mind that a family trust comes with costs and compliance obligations. It is highly recommended to seek professional advice to ensure a family trust is the most appropriate structure for your circumstances.
Talk to the financial planning experts
First Financial offers clients more than a suite of financial services. We offer professional financial advice tailored to your needs and long-term goals. If you’re considering a business structure, speak to our expert team today and make the best possible structural decisions for your circumstances.
