Family Trusts are a popular small business structure. They can serve a wide range of purposes and be extremely useful vehicles for tax planning, financial planning and investment.
We take a look at the basic principles of a family trust, their benefits and how they work.
What is a Family Trust?
Firstly, let’s unpack what a ‘trust’ is in simple terms.
A ‘trust’ simply refers to a relationship where property is held by one party (the ‘trustee’), on behalf of other parties (the ‘beneficiaries’) who are entitled to the fruits of that property.
A trustee is the legal owner of the property, yet the beneficiaries are the beneficial owners. It’s a special kind of relationship where there is a distinct separation between the legal and beneficial ownership of property.
For example, if I have $100 and want it to be set aside (held on trust) to be given to my son when he reaches age 21. I might as my friend Michael, “could you please hold this $100 on trust for my son until he turns age 21.” We have just created a trust; the essential elements of which are:
- Property –> $100
- Trustee (someone to hold the property on behalf of another) –> Michael
- Beneficiary –> my son
- There is intent.
- There is an obligation to deal with the property for the benefit of the beneficiary(s)
A Family Trust is simply a special type of trust which is generally used to hold assets and distribute income to beneficiaries all belonging to the same family.
Who might use a Family Trust?
A wide range of people might use a Family Trust. These include business owners, a family group wishing to share investment income, investors, those wishing to provide a safety net around assets and those wanting to pass assets from one generation to the next using the same vehicle.
What are the benefits of a Family Trust?
Those setting up a family trust usually have a range of overlapping objectives in mind, such as to:
- make provision for their family, including young children and children with a disability
- attach certain conditions to gifts
- give children the benefits of family wealth without losing control over key assets
- create a framework for family assets to be passed from generation to generation
- protect these assets against potential creditors
- create a tax effective structure where taxable income can be distributed to different family members (beneficiaries) each year
How does a Family Trust work?
A Family Trust is generally controlled by a company with one or more directors. The company holds the assets “on trust” for the future use and enjoyment of the beneficiaries. In most family trusts, none of the beneficiaries have an entitlement to assets in the trust – they are merely to be considered as potential recipients of income each year, as determined by the trustee. The trustee may use its discretion to distribute the income in the most effective manner.
Getting good advice on whether a Family Trust is suitable for your circumstance is vital. If you need further help or guidance on setting up a Family Trust, contact a financial planner who can assess whether it’s right for you.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.
