Historically, Family Trusts originated in England hundreds of years ago. The original purpose was to avoid feudal dues payable on land transactions. A landowner would give a piece of land to a friend to “hold on in trust” for his descendants. This arrangement avoided paying dues as the land passed from one generation to the next.
Modern Family Trusts are now far more evolved and sophisticated but still retain many of their original tax planning advantages.
A Family Trust is more formally known as a Discretionary Trust.
The trustee has the power or discretion to decide which beneficiary or beneficiaries receive the net income and the capital from the trust each year, or on winding up the trust. Beneficiaries are mainly members of the same family who are happy for the trust income to be distributed in a way that satisfies their common interests and objectives.
The common interests and objectives of beneficiaries of Family Trusts frequently include legally minimising the total tax paid on the trust’s net income.
In addition, family trusts can be used to put valuable assets beyond the reach of potential creditors. Legally, the transferor has no recognised interest in the transferred property and the family trust. Therefore, transferred assets cannot be accessed by creditors if the transferor gets into financial difficulty or even goes bankrupt.
Top advantages of a Family Trust
- Income tax advantages
- Capital gains tax advantages
- Asset protection advantages; and
- As retirement planning vehicles
The major disadvantage of a trust is that it cannot distribute capital or revenue losses to its beneficiaries. As a result, net losses incurred by the family trust will not be able to offset any other assessable income derived by the beneficiaries.
The benefit from family trust will depend on investments held and its intended purpose.
A family trust on its own does not create wealth and is not for everyone.
In the 2014 / 2015 financial year, there are almost 643,000 discretionary trusts in Australia – Figures provided to Fairfax Media by the ATO.
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