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A family trust otherwise known as a Discretionary Trust is a trust commonly set up in Australia but poorly understood as to why you would set one up.

One of the main reasons for setting up a family trust is to protect your assets from creditors. Once your assets are passed into the trust you no longer own it. The trust owns it, and therefore out of reach as you no longer legally own them.

It is a common structure set up by business owners and ideal for families with private businesses.

What is a family trust?

Before we highlight the benefits of a family trust let’s understand exactly what it is. A family trust or a discretionary trust is as the name suggests. The trustee has the discretion to decide who receives the distribution, and when it should be distributed. This is outlined in the trust’s terms, and must be adhered to.

What are the benefits of a family trust?

Asset Protection

A primary reason for setting up a family trust is asset protection. This means any assets sitting inside a family trust is not personally owned by you, and therefore out of reach from creditors. Thus a common structure for small business owners to set up.

Flexibility (Discretion)

Flexibility in decision making as to how to share the burden of tax amongst family members and the control in who to, and when to distribute income are other strong reasons for a family trust set up.

Practical

A family trust is not just for the wealthy but it’s a practical vehicle to protect family and business assets.

Tax-effective

As you distribute the income amongst family members, you can distribute income to members to make it as tax-effective as possible.

Retirement Savings

A family trust structure is an additional source of income for retirement which sits outside of super rules and limits.

Set funds aside

It can hold funds for special causes for your children such as monies set aside for education or to ensure funds are held in trust for a child until they are responsible enough to manage their own finances.

Estate Planning

It protects assets from unwanted claims made against the estate from former partners when you pass away, and your children or beneficiaries inheritances are safeguarded.

So, before you set up a family trust ensure you are aware of all the reasons why it is the right thing for you and for your family. Be confident of, and understand what you are doing especially the pitfalls or the costs associated with setting up and managing a family trust.

If the positives outweigh the negatives for you then consult a financial planner to dot the ‘i’s and cross the t’s with you, and if need be they can refer you to an estate planning specialist for specific estate planning needs.

The information contained on this website has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.