Family trusts and investments

Do you have or are you considering creating a family trust? Here in Australia, they are becoming increasingly popular and with good reason.

They have unique advantages and can help you with your financial planning, investments and tax distribution.

Many investors build their wealth through portfolios that they own under their personal names… but a family trust might be a more appropriate ownership structure that could offer greater value to you and your family.

Today, we take a closer look at family trusts and their investment benefits.

What is a family trust?

What is a family trust?

A family trust is a discretionary trust, created to protect a family’s assets – which can include a family business.

You may establish a family trust in order to minimise exposure to taxation, or to guard assets from business failure, but it can also be useful for holding future inheritances.

In simple terms, a trust is an agreement where a trustee (a person or a company) holds assets for the benefit of beneficiaries – usually family members.

How do they work?

How do they work?

In order to create a trust, you need to appoint your trustee and they become the legal entity that owns the assets and acts on the trust’s behalf.

They must follow the trust deed and complete transactions, when necessary, but they must always act in the best interests of the beneficiaries.

The trust functions as an investment vehicle and by separating the family assets, shields them from the personal or business risks of the individual family members.

Benefits of a family trust

Benefits of a family trust

There is a wide range of benefits, but some of the reasons you may choose to set up a family trust include:

  • providing for your family into the future; this can include children and grandchildren
  • providing children access to family wealth while maintaining control over major assets
  • creating a structure to pass family assets from generation to generation
  • protecting assets from personal or business creditors; this is particularly important in the event of a divorce. If your child separates from a partner, assets held within the trust are protected.
  • allocating specific conditions on financial gifts
  • developing a tax effective structure to distribute taxable income between different beneficiaries each year.

This last point is a key advantage of family trusts. Having flexibility to distribute investment income in different amounts across the beneficiaries each year can be extremely useful in minimising taxable income.

Some considerations

Some considerations

There are, however, some considerations you need to take into account when setting up a family trust:

  • If any annual trust income is not distributed to beneficiaries, it is taxed at the highest marginal tax rate.
  • Income distributions to children under the age of 18 years are taxed at up to 66%.
  • The trust cannot allocate tax losses to beneficiaries.
  • While they are relatively inexpensive to set up, a family trust can cost a significant amount as it becomes more complex to manage.
  • Managing a trust can become challenging if a family dispute occurs.

Talk to a financial adviser

Overseeing a family trust can be a complex undertaking and we recommend seeking professional advice to make sure it will suit you and your family’s needs.

Here at First Financial, our team has the knowledge and experience to help you maximise the benefits of your family trust. If you’d like to find out more or speak to one of our Financial Advisers, please contact us today. Read more articles about investments.

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