The law of trusts is requires careful planning in order to be effective and legal for a variety of purposes. To describe this they have rules associated with their establishment which in essence dictate what they can and cannot be used for. Broadly, a Family Trust is established in order to manage the assets of the members of a specific family. Through the rules contained in the trust deed establish the trust you can find out who can be a beneficiary, but there are some general rules which can help you decide how to set up your Family Trust. We will explore these below.Â
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What Is a Family Trust?
Family Trusts are discretionary trusts. This means they operate under the discretion of a trustee. The settlor creates the trust through a trust deed. It is their intention which matters in the operations of the trust. They can be a trustee or beneficiary once the trust has been created. It artificially splits the title from the benefits that flow from ownership of the trust property. The beneficiary under a trust is the one or more persons who do not possess legal title over the trust property but receive the benefits that the ordinary owner of similar property would i.e. ‘beneficial ownership’. The trustee is responsible for running the trust, paying any taxes and distributing benefits to the beneficiaries.
For legal purposes a trust officially becomes a Family Trust when a trustee completes a successful Family Trust Election (FTE). A trust can also become a Family Trust when the trustee completes and FTE for the current financial year.
What Is in a Trust Deed?
A trust deed will contain all the information to describe how the trust will operate and who it will serve. It outlines the purpose of the trust which restricts how the trust can be used. It includes the appointee, trustee/s who manage the operation of the trust and the beneficiaries of the trust. Included with this information are the rights of all these parties and the powers of the trustee. These can be wide or narrow in scope, usually depending on the purpose of the trust.
Beneficiaries in a Family Trust
Under a Family Trust who the beneficiaries are is up to the settlor and subsequently the discretion of the trustee. The settlor will name the initial beneficiaries in a schedule of the trust deed. For the purposes of the FTE and individual will be specified to form the reference point for the family group. Any subsequent beneficiaries are usually immediate family members or other close relatives of these initial beneficiaries. These initial beneficiaries can be listed by name or be unnamed. A listed unnamed beneficiary would look like ‘the spouse of John Smith’.
The income or capital that flows to beneficiaries can be from an entitlement under the trust deed or can be given by the trustee under an exercise of their discretion within the trust rules. This usually means the trustee will nominate a beneficiary to receive income from the trust in a given financial year.
A trustee can also be a beneficiary under a trust but cannot be the sole beneficiary under a trust unless there are multiple trustees. This helps to avoid any conflict of interest.
As a side note, beneficiaries pay tax on their share of the trust’s net income instead of the income actually paid to them. Income is usually allocated to family members with lower income in order to be more tax efficient.
Classes of Beneficiaries
These family members are relations of any initial beneficiaries specified in the trust. The classes of potential beneficiaries to a Family Trust are:
- Parents
- Grandparents
- Brothers and sisters
- Children
- Grandchildren
- Aunts and uncles
- Nephews and nieces
- The lineal descendants of children, nieces, nephews.
Even after the death of their blood connection a person may still be a family member. For instance the spouse of a deceased specified individual will still be a family member, as long as they were the individual’s spouse at the time of death.
A family controlled or owned company may also be beneficiary. All bodies that are exempt from income tax may be beneficiaries of a Family Trust, like charities.
Another trust with the same FTE reference individual may also be a beneficiary but its important to ensure the majority of the income of the trust goes to family members. Other trusts have different rules and beneficiaries who may not be related to the original trust initial beneficiaries.
Detailed information on the tests and obligations associated with a Family Trust can be found on the Australian Tax Office website.
Finally
A Family Trust can be a useful structure for managing assets and wealth. The discretion of the trustee allows a lot of flexibility in how the trust income is distributed to a wide choice of family members. To discuss options further, you can seek out a trust lawyer to assist you in setting up your trust correctly from the outset.
