8 min read

How to set up a Trust Fund

If you own your own home, investment properties or other assets you probably intend to share the wealth with your family later in life. You could hold onto it all until you die and leave it in your Will. Or you may consider engaging in effective financial planning, and set up a Trust fund instead. In this post, we explain what a trust fund is, and if you should consider setting one up for your family's assets..

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What is a Trust Fund? How does it work?

A trust fund is where your assets are placed into an account that is held by another person. This is so other people can benefit from it other than the original owner. You don't need to have major assets to have a trust fund. Trust funds can hold multiple kinds of assets. These include:

  • Real estate;

  • Property;

  • Stocks;

  • Cash;

  • Bonds;

  • Items of high value (such as antiques or fine art).

When you create a trust fund certain assets are placed into an account that is managed by an individual or a group of individuals. The person or entity in charge (the trustee) is responsible for overseeing the trust and distributing the assets. The trust must contain a clear outline the terms and structure of the trust:

  • The purpose of the trust

  • How trust distributions will be paid to beneficiaries

  • Who the trustees are

  • Who the current beneficiaries are (i.e a family member)

  • Who can be a beneficiary in the future (i.e future children)

This makes sure individuals can safely and securely manage, and then pass on their assets to the people and family group who deserve them most.

Another way trust funds can be used is for separating a person's assets from their estate or portfolio. This is because a trust is not a separate legal entity under Australian law. It is an estate-planning tool that puts a person or entity in charge of holding an individual's assets for the benefit of another person or people.

This has implications for asset protection, how you pay tax on these assets, as well as the legal process of passing on the trust's income to a future beneficiary after you die.

How do you set up a trust fund?

When setting up a trust fund, you need to first identify the parties involved. They include:

  • Settlors: the person/people who establish the trust.

  • Trustees: the person/people who manage the trust (and eventually distribute the assets).

  • Beneficiaries: the person/people who receive the assets from the trust.

Then, when it comes to setting up the trust fund, it is relatively straightforward.

1 – Decide which assets you want in the trust fund

Top of your to do list when you create a trust is including a list of what specific assets you want to include in your fund, and their value. This will determine the eventual distribution to the beneficiary- and can include property, online assets, any any key investment.

2 – Choose a trustee

While it could be anyone you choose, you still want to make sure that your assigned trustee is a person you believe will act fairly and impartially to avoid a conflict of interest. For family trusts where tension can arise, it's sometimes wise to choose a more impartial, or professional trustee.

3 – Choose your beneficiaries

You need to decide who will receive the contents of your trust fund. You may also want to consider how much the beneficiaries will receive as a set amount or percentage. This will vary depending on the type of trust you set up, with family trusts outlining the beneficiary as a current or future family member.

4 – Create a trust deed

A trust deed must be included in all trust funds in Australia. This s a legal document which includes:

  • The rules of your trust; and

  • The powers the trustee has.

It's important to include a trust deed in the terms and structure of your trust because otherwise it will be difficult to set up the trust fund. To ensure you do this correctly, we recommend seeking legal and financial assistance from a lawyer or an accountant. They will be able to advise on the tax implications of your trust fund, as well as settle any legal issues to assist with a future smooth distribution.

5 – Settle and sign the trust

For the trust deed to be valid the settlor and everyone listed as a trustee must sign it. It's important to complete this step to save stress from the trust not being legally valid. Having all parties sign the trust ensures the trust income flows to where you want.

6 – Pay stamp duty

Depending on the state you're living in, stamp duty may apply when you establish a trust. It is important to allow yourself enough time and additional funds to deal with those payment requirements online.

7 – Create a Tax File Number(TFN) or Australian Business Number (ABN)

A trust must have its own tax file number for Australian tax purposes. This number will be used by the trustee to lodge income tax returns for each financial year. If the trustee is engaging in business activities using the the trust's net income, it will also need an Australian Business Number. This includes any specific investment or trade activities, or operating a business.

8 – Open a bank account

The bank account should be opened under the name of the trustee, as this will create a channel for trust income to flow into.

9 – Commence trust activity

Once the bank account has been opened, the trust fund becomes operational, and you can accept income contributions, or make investments. These must be done according to the terms in the trust deed.

How do trust funds pay out?

There are multiple ways that trust funds can pay out. This will depend on what trust you have decided to set up. There are several different types of trusts that individuals could use. They include:

1. Discretionary family trust: trusts used to hold family assets, conduct a family business or arrange future payouts to a family group.

2. Fixed trusts: a trust where the benefits (the distribution of assets and/or income) are fixed. This means that the trustee has no discretion on how it is distributed.

3. Fixed unit trusts: like a fixed trust except the capital and income among the beneficiaries is shared based on how many units they have in the trust.

4. Testamentary trusts: a trust set up in the event of your death and established under the terms of your will.

5. Special disability trusts: a trust to plan for the long-term care and accommodation needs of someone with a severe disability.

6. Charitable trusts: used to support a variety of charitable organisations.

7. Superannuation proceeds trusts: a trust that contains the deceased's superannuation death benefits. This protects the death benefit from third parties who may try to access the funds.

  1. Discretionary trust: a trust where the distributions to each beneficiary are not fixed, and at the discretion of the trustee

The Benefits of a Trust Fund

Setting up a trust provides a wealth of benefits for both the creator and the recipients of the trust. These extend across financial benefits in relation to how you pay tax on these assets, as well as heightened property security and protection for your family.

The main advantage of using a trust is that any accumulated wealth is properly controlled so that the recipients receive the most benefits. Some of the other reasons for establishing a trust include:

Providing for family members: a trust fund for individuals can be a way to ensure that their assets are properly held, gathered, and distributed in the future. A trust fund allows the individual to maintain a level of control over how they want their assets to be managed.

Protect wealth for future generations: a family trust or fund minimises the risk of family disputes over inheritance. This can safeguard important family property, as well as help support your loved ones with special gifts.

Protecting assets from creditors or lawsuits: a trust fund could also be created to separate a person's assets from their personal estate. For instance, if there was a claim made against you in your own business, the assets would not be in your name. Instead, the assets would be under the name of the trustee. This protects these assets for family use, and ensures they are free from any disputes under your name- including divorce or taxes

Tax purposes: The main benefit of placing assets in a trust fund is that the income generated by those assets can be distributed to beneficiaries at the tax rates which apply to them. Whilst they are not free from tax obligations, this can save your loved ones money from a lower marginal tax rate.

Final Considerations

Trusts have become a common way of managing financial affairs, and a logical, tax efficient way to distribute earnings. They are an effective financial tool to protect someone's wealth for existing family, future children or other important parties.

Whilst trust funds can be simple to set up, it is crucial for them to be done correctly. Many online platforms offer general guidance, however it is highly recommended you seek professional advice if you are contemplating setting up a trust fund. These services are not free, however this cost marks a key investment in securing your wishes.

How Safewill Can Help

Safewill offers an easy, flexible and affordable way to write your Will and set up any trust funds. Our legal experts are available to support at each step of the way- granting you peace of mind that your assets and your family are protected going forwards.

Write your Online Will today

Start your estate planning today, to support your family in a future tomorrow. It's peace of mind, it's security and it's taking control of your legacy in one.

Reach out on 1300 730 639, or via livechat now to find out more.

Last updated 26th November 2021
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Lauren Barrientos
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