For many Australians, family trust is a way to structure finances within a household or family.
While these can be set up yourself, it is advisable to get them set up by a qualified tax accountant, who can help you take advantage of this structure and avoid common pitfalls.
Here are the benefits and risks of setting up a family trust in Australia.
Benefits of Setting Up A Family Trust
1. Protects Your Assets
You can set up a family trust to protect your assets from creditors. The ownership will remain within your trust, so your creditors cannot access your asset.
2. Lowers Your Tax
You can use your family’s trust to lower the total income tax of your whole family. The trustee can allow more distribution to the family members with lower income tax rates.
3. Planning for Retirement Savings
It’s vital to plan for your retirement savings. The flexible structure of a family trust allows income and assets to be managed strategically, making it easier to build and preserve wealth over the long term. You can use the savings to supplement your superannuation.
4. More Flexibility in Investing in a Property
A family trust allows you to hold assets in a separate legal structure, which can provide flexibility in how those assets are managed, transferred, or distributed over time. This is because a family trust does not have strict rules. It can, therefore, make it easy to invest in a property.
5. Capital Gains Tax (CGT)
Once you sell an asset, you will have to pay capital gains tax. A family trust, on the other hand, gets a fifty per cent discount on capital gains tax for the profits made, provided the profit distribution is made to an individual. However, the family trust must have held the asset for over 12 months.
Risks of Setting Up a Family Trust
1. Unintentional Tax Avoidance
It is risky to avoid paying taxes. It is an illegal action. It can, therefore, get you in trouble. It is best to talk to a tax accountant to avoid unintentional tax avoidance.
2. The Name Bears the Legal Burden
Once you set up a family trust, you will be the legal owner. That is why your name will appear on every document. This can be overcome by having a company as a trustee.
3. Loss of Ownership of Assets
If you decide to manage your assets through a family trust, you will lose ownership of your assets. However, you can still maintain control of the assets.
4. Additional Cost for Administration
A family trust comes with ongoing administrative and compliance costs that need to be considered before setting one up.
These typically include:
- Annual tax return preparation
- Accounting and advisory fees
- Record-keeping and reporting requirements
- Trustee resolutions and distribution documentation
Unlike simpler structures, a family trust requires proper management each year to remain compliant with Australian tax laws.
While these costs can be justified by the tax and asset protection benefits, they should be factored into your decision to ensure the structure is cost-effective for your situation.
5. LIMITED ACCESS TO TAX LOSSES
Losses generated within a family trust cannot be distributed to beneficiaries. This means they cannot be used to offset personal income, which can reduce tax efficiency in certain situations.
6. COMPLEXITY AND COMPLIANCE REQUIREMENTS
Family trusts require proper administration, including annual distributions, record-keeping, and tax reporting. Incorrect handling can lead to compliance issues or unintended tax consequences.
When Are the Benefits and Risks of a trust Most Relevant?
The advantages and risks of a family trust become most important when you are deciding whether this structure is suitable for your situation.
Factors such as income level, asset base, business involvement, and long-term financial goals will all influence whether the benefits outweigh the risks.
Why Consult a Professional to Set Up Your Family Trust?
Once you decide to set up your family trust, it is beneficial to consult a professional. The professional can help you set up your family trust properly to prevent disputes in the future.
If your family is looking for a tax accountant to help you set up a family trust in Perth, Western Australia, then contact Griffiths Advisory today. We can help you build generational wealth and secure your future.
Frequently Asked Questions About Family Trusts in Australia
1. Is a family trust suitable for every situation?
No. A family trust is not suitable for everyone. It is generally more effective for individuals or families with higher income, multiple income streams, or growing assets. For smaller or simpler financial situations, the costs and complexity may outweigh the benefits.
2. When does a family trust start to make financial sense?
A family trust typically becomes more beneficial when there is enough income to distribute across multiple beneficiaries or when asset protection becomes a priority. It is often used once financial structures become more complex.
3. Can you change or restructure a family trust later?
Family trusts are flexible, but making changes later can be complicated and may have tax implications. It is important to set up the structure correctly from the beginning to avoid unnecessary costs or restructuring issues.
4. What happens if a family trust is set up incorrectly?
If a family trust is not structured or managed properly, it can lead to compliance issues, unexpected tax outcomes, or disputes between beneficiaries. This is why professional setup and ongoing advice are important.
5. Can a family trust be used alongside other structures?
Yes. A family trust is often used together with other structures, such as companies or superannuation strategies. The effectiveness of the trust depends on how well it fits into your overall financial structure.
6. Who is responsible for managing a family trust properly?
The trustee is responsible for managing the trust, including making distributions and ensuring compliance with tax laws. However, most trustees rely on accountants or advisors to ensure everything is handled correctly.
7. What should you consider before setting up a family trust?
Before setting up a family trust, you should consider your income level, long-term financial goals, asset base, and whether the ongoing costs and complexity are justified for your situation.
8. How long does a family trust last in Australia?
A family trust is generally established for long-term use and can last many years, depending on how it is structured and managed. It is typically used as part of a long-term wealth and asset strategy.
Related posts:
- Family Trust Australia Explained
- How a Tax Accountant Can Help Minimise Your Small Business Tax Bill
- How Can A Small Business Accountant Help Your Business?
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Phil has been the Managing Director of Griffiths Advisory for 29 years, combining his expertise in taxation, business advisory, superannuation, negative gearing, and wealth creation. He also loves an active lifestyle, indulging in surfing, cycling, snowboarding, and spending quality time with his wife and two children.
