Family Trusts have long been a cornerstone of smart financial and estate planning in Australia.
Often referred to as Discretionary Trusts, they provide families, professionals, and business owners with a flexible way to manage wealth, protect assets, and optimise tax outcomes.
At their core, family trusts are designed to hold and distribute assets such as property, shares, or business interests on behalf of family members (the beneficiaries). The trustee – an individual or corporate entity – controls how income and capital and distributed each financial year, offering both flexibility and protection.
One of the most common reasons Australians establish a Family Trust is the potential for tax-effective income distribution. By allocating income among family members who may have lower marginal tax rates, families can often reduce their overall tax burden and improve their after-tax returns. But while these advantages are well-known, they are not the whole story.
A Family Trust can also serve broader purposes – from asset protection against creditors and relationship breakdowns, to succession planning that helps pass on family wealth smoothly between generations. However, as with any legal structure, family trusts come with specific obligations, complex tax rules, and potential risks that should not be overlooked.
Understanding both the benefits and limitations of a family trust is crucial before establishing one. Below, we explore how Family Trusts work, their key advantages, and the common pitfalls to be aware of.
What Is A Family Trust?
A Family Trust is a legal structure established under a trust deed.
It allows a trustee to hold assets on behalf of nominated beneficiaries – typically members of a single family group. Unlike companies, which are taxed as separate legal entities, trusts generally distribute income to beneficiaries, who then pay tax at their own marginal rates.
This feature provides flexibility in managing how income is taxed each year. The trust can also own property, investments or a family business, creating a structure that separates asset ownership from personal ownership – a key advantage for protecting family wealth.
The Benefits Of A Family Trust
Tax-Effective Income Distribution
One of the most recognised benefits of a family trust is the ability to distribute income among family members in a way that minimises the overall tax paid. For example, where one family member earns little or no income, the trustee can distribute a portion of the trust’s income to them, potentially reducing the family’s total tax liability.
This flexibility is particularly helpful for families with adult children, retirees, or beneficiaries in different tax brackets. However, it’s important to ensure all distributions are made according to the trust deed and documented before 30 June each financial year.
Asset Protection and Risk Management
Assets held within a properly structured family trust are generally protected from the personal liabilities of beneficiaries.
For business owners or professionals in high-risk industries, this can help safeguard family wealth from potential creditors or legal actions.
Additionally, trusts can be used to protect assets in the event of marriage breakdowns or financial disputes, offering an extra layer of security when compared to holding assets personally.
Estate and Succession Planning
Family trusts are also an effective succession planning tool, enabling wealth to be transferred between generations in a controlled manner. For example, farmland, business assets or investment properties can remain in the trust, allowing the next generation to benefit without triggering an immediate sale or capital gains tax (CGT) event.
The continuity offered by a family trust can ensure long-term stability for family-owned businesses and help preserve assets within the family group.
Flexibility and Control
Unlike companies, which are bound by shareholding rules, family trusts provide flexibility in how income and capital are distributed each year.
Trustees can adjust distributions based on the family’s changing circumstances, providing a responsive and adaptable structure for managing wealth.
The Risks and Complexities of Family Trusts
While the advantages of a family trust can be substantial, the structure also comes with several important risks and compliance obligations that must be managed carefully.
Complex Tax and Compliance Rules
The rules governing trusts are detailed and, at times, difficult to navigate.
For example, to “stream” capital gains or franked dividends to specific beneficiaries (so that they retain their concessional tax treatment), strict legislative requirements must be met.
If these rules are not followed correctly, or if the trust deed doesn’t expressly permit streaming, the trustee could face unexpected tax consequences. Keeping the trust deed up to date and obtaining professional advice before year-end distributions is essential.
Restrictions on Capital Losses
Unlike partnerships, trusts cannot distribute capital losses to beneficiaries. Instead, any losses remain within the trust and may only be used to offset future income or capital gains if certain continuity of ownership tests are satisfied.
Often, this requires making an irrevocable family trust election, which locks the trust into distributing income to nominated beneficiaries only – reducing flexibility in future years.
Limited Tax Benefits for Children
Contrary to common belief, distributing income to children under 18 is generally not tax-effective. Such distributions are. taxed at penalty rates that often approach the top marginal rate, although a small tax-free threshold (around $700) does apply.
Finite Lifespan and Potential CGT Implications
Most Australian trusts have a maximum lifespan of 80 years. When the trust reaches this point (known as vesting), all assets must be distributed to beneficiaries. This process can trigger significant capital gains tax (CGT) liabilities, depending on how asset values have changed over time.
Legislative and Legal Uncertainty
Recent developments have also introduced new areas of complexity.
For instance, questions before the High Court about whether companies can incur Division 7A tax liabilities on unpaid present entitlements (UPEs) from trusts may influence how family trusts are used in future.
These evolving rules make it vital for trustees to review their structures regularly to ensure compliance with the latest tax and legal frameworks.
Is A Family Trust Right For You?
Establishing a family trust can be an effective strategy for tax planning, asset protection and intergenerational wealth transfer, but it’s not a one-size-fits-all solution. To gain the full benefit, the trust must be structured correctly from the outset, with a clearly defined purpose and an up-to-date trust deed.
Regular reviews are also essential to ensure compliance with Australian taxation law and to adapt to changes in family circumstances or legislation.
Wilson Pateras and Your Family Trust
If you’re considering setting up a family trust, or believe your existing one may need review or amendment, our team can help.
Our team of accountants and advisors work closely with families and business owners to design trust structures that align with your financial goals and provide lasting protection for your assets.
Get in touch with our team today to talk about your options.
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