A Step-by-Step Guide to Creating a Family Trust Fund
Family trust funds are becoming increasingly popular amongst Australian families thinking ahead. From protecting your assets, managing your personal finance and kickstarting effective estate planning, setting up a family trust fund can offer an array of financial and emotional benefits. It's a common misconception that trust funds, and the associated benefits, are exclusive to the ultra-wealthy, perpetuated by the Hollywood portrayal of the stereotypical trust-fund baby. It's created an aura of eliteness around this legal entity, despite the fact that they’re accessible to many Australian families. In this blog post, we'll be discussing what a family trust fund is, the key benefits to family members, and whether setting up this legal entity is suited to your family, your beneficiaries and your estate.
Unlocking the Potential: A Comprehensive Guide to Family Trusts and Wealth Preservation
Whilst it's true that trust funds can be an expensive legal document used to pass on generational wealth, they're also an effective financial and estate planning tool. And, contrary to popular belief, the benefits of a trust fund are accessible to families from all socioeconomic backgrounds- including tax benefits, protection to a person's assets and personal estate, as well as family trust advantages, such as the opportunity to provide financial support to future generations.
Read on to cover the basics of family trusts:
What is it?
Why set up a trust?
How can a trust protect wealth and provide financial support?
Setting up a trust
Let's dive straight in.
What is a Family Trust?
It's a legal document that allows families to hold and manage a person's assets for the benefit of its chosen beneficiaries. A trust fund can include real property, income stream or a lump sum of money from a personal estate, which, depending on the fund's objectives, can be used to provide financial support to parties involved.
Representing an effective way to transfer a person's assets, a trust agreement involves three parties; yourself, a trustee and beneficiaries.
Understanding Fiduciary Responsibilities: Trustee Duties and Asset Distribution in Discretionary Trusts
All your assets in the trust are held by the trustee, who has a fiduciary duty to manage and distribute these to the third party, according to the terms of the trust. Beneficiaries of a discretionary trust, in this case a family member, receive these assets at the discretion of the trustee, and in accordance with the guidelines of the trust documents.
Different Types of Trust Funds: Revocable vs Irrevocable Family Trust
There are many different types of trusts which you can set up to meet various goals. Much like a charitable trust or testamentary trust, a family trust can fall under an irrevocable trust or revocable trust.
An irrevocable family trust cannot be changed or revoked after it has been formed- placing full control of these assets into the hands of the trustee. In this way, irrevocable trusts represent an effective solution to the risk a future child or grandchildren won't receive the assets you want them to. To achieve this level of security and guarantee asset distribution, you must be prepared to give up any further management rights on these assets.
In contrast, a revocable family trust offers the benefits of heightened flexibility and maintained control of your assets- representing a form of living trust which you control over time. Once established, the assets in a trust fund of this type can be altered. You can decide to change beneficiaries and make adjustments in line with income or life changes.
Required Elements of a Trust Deed
A trust deed is a legal document that formalises the establishment and operation of a trust. Serving as the foundational framework for the trust, this deed outlines the specific terms, conditions, and responsibilities governing the trust arrangement.
Within its provisions, the trust deed clearly defines the roles of the involved parties, including the Settlor (the person creating the trust), the Trustee (responsible for managing the trust assets), and the Beneficiaries (those who stand to benefit from the trust). Additionally, the trust deed articulates the purpose and objectives of the trust, the conditions under which beneficiaries may receive distributions, and any limitations or special provisions that shape the trust's operation. It acts as a legal contract that safeguards the interests of all parties involved, providing a comprehensive roadmap for the effective administration and distribution of trust assets in accordance with the intentions of the Settlor.
A well-crafted trust deed is fundamental in ensuring transparency, legal compliance, and the smooth functioning of the trust over time.
Will You Have to Pay Tax on Trust Fund Assets?
Yes. Whilst creating a trust fund can have tax efficiency benefits, you may still have to pay taxes on the assets passed down via a family trust. In Australia, this could vary from income tax, capital gains tax, and stamp duty. The tax obligations will depend on various factors such as the type of trust, the type of assets, and the residency status of the beneficiaries.
Family Trust Distribution Tax
Understanding the tax implications of a family trust is paramount for effective financial planning. When distributions are made from a family trust, they may be subject to tax, and the amount can vary based on factors such as the personal marginal tax rate.
In Australia, beneficiaries are taxed on the income they receive from the trust at their individual marginal tax rates. This means that distributions to beneficiaries with higher incomes may incur a higher tax liability compared to those in lower tax brackets. It's essential for trustees and beneficiaries to be aware of the potential tax consequences and to strategically plan distributions to optimise tax efficiency. Additionally, the residency status of beneficiaries can further influence the tax treatment of trust distributions.
Seeking the guidance of tax professionals or financial advisors is advisable to ensure a nuanced understanding of the tax landscape and to implement strategies that align with the family's overall financial goals.
The Benefits of a Family Trust
1. Asset Protection
Placing assets in a family trust means losing ownership rights to these assets. This comes with many benefits; including protection against the event of divorce or bankruptcy, as well as creditor protection and various tax benefits.
2. Control
Despite this lack of ownership, in transferring assets to a family trust you benefit from more creditor protection and favourable tax implications, whilst maintaining control over management and distribution of these assets.
In this way, a family trust ensures your asset distribution wishes are safeguarded against financial or legal challenges, and even death. You can even put conditions on when beneficiaries receive access to the trust assets, whether that's at a certain age or when they complete college. Similarly, you can pass assets into a spendthrift trust, which further safeguards your final wishes on how the beneficiary will use these trust assets after you pass away.
3. Estate Planning
With a family trust, beneficiaries receive their share of the estate, whilst managing to avoid probate and its associated stress. In contrast to bank accounts and assets still owned by the deceased which have to go through the probate process, the transfer of trust property and trust assets to beneficiaries or surviving spouses follows a much smoother legal process.
4. Privacy
In thinking about passing on generational wealth, family trusts also offer greater privacy compared to the probate process- where the distribution of assets and other investments in the estate plan details are made public. Transfer of trust assets not only avoids a costly and delayed probate process, but avoids the associated family feuds from public record of any unequal distributions.
When Might Family Members Benefit from Trust Documents?
Business Ownership
A family trust can help protect the family business and ensure its continuity for future generations. This also provides a flexible way to distribute even small business assets (profits) amongst family members on a year to year basis.
Special Needs Beneficiaries
A family trust can also be used to secure financial wellbeing for any family members with special needs, without jeopardising their eligibility for funding support from government programs. The manager of the trust, the trustee, can also provide support to this individual on managing their portion of the state on top of government benefits.
Blended Families
Where there is a complex mix of surviving spouse, step and biological children, a family or marital trust can represent an effective way to distribute assets fairly. This avoids family disputes, as well as any changes to your wishes from will contestants.
How to Set up a Family Trust with An Estate Planning Attorney
Consult a professional: Whilst associated with an array of benefits, trust assets are a part of a complex legal process which require the advice of a professional. Seek the advice of an attorney or qualified financial advisor to ensure that the trust document is set up correctly to cover the bases on estate taxes, successor trustee and your'e specific goals. Aside from your own family trust, this could also mark a good time to consider a life insurance policy and last will and testament to cover other family bases.
Determine the purpose and terms of the trust: From the offset, it's important to clarify the purpose of the trust in alignment with your goals. This will guide the terms of the trust and ensure the right legal requirements and wording are used to meet these goals.
Choose a trustee: Given that the trustee is responsible for managing and distributing the assets, it's important to choose someone trustworthy and competent. For this reason, some people choose to appoint an independent trustee as a way to ensure this competency and financial literacy.
Fund the trust: Assets must be transferred into the trust for it to be effective. And crucially, once these assets are transferred, they're secure from bankruptcy or creditors.
Maintain the trust: Regular reviews and updates to your family trust are necessary to ensure it continues to meet your goals and your family's needs. Make the most of the flexibility and high level of control of your assets to get the most out of this financial tool.
To Wrap Up
Family trusts offer a range of benefits from asset protection to estate planning, support for family group members and heightened control and privacy. Contrary to popular belief, a family trust and its associated benefits are accessible to families from all backgrounds; providing immense peace of mind and security on your asset management wishes.
Whether you're considering living trusts, irrevocable trusts or a revocable trust for your own family and family assets, you should seek the advice of a professional to guide your own trustee choice, family trust structure and estate planning goals.
How Safewill can help
Safewill offers an easy and flexible platform from which to write and update your will, as well as establish a family trust. We provide expert legal support at each step of the way- with helpful tips to ensure the validity of these legal documents, open up family communication and avoid future challenges to your asset distribution wishes.
To get started today, give us a call on 1800 103 310 , or via live chat now.