Family Trusts

Disclaimer: I am not a lawyer.  I am not an accountant.  I am not a financial adviser.  The description below is written in layman's terms, by a layman.  It may not be accurate.  Seek professional advice.

At about the same time that I setup my SMSF, at the advice of my accountant, I also setup a Family Trust.

A Family Trust is similar in structure to the SMSF, in the sense that it a legal entity, essentially created by the existence of a deed document.  It can own assets.

So, why setup a Family Trust?

A Family Trust allows me to distribute any income received by the Family Trust to the beneficiaries of the Trust in a discretionary manner.  The beneficiaries of the Trust are the people (generally immediate family members) that can receive income generated by the Trust.

The real advantage of the Family Trust is the discretionary nature by which income can be allocated.  Basically, income can be allocated as required (or, at the sole discretion of the Trustees) as to maximize the net benefit (ie, after tax) to the beneficiaries.

So, in my case, my partner and I will likely alternate being the primary income earner and the primary care giver across a number of years.  Using the Family Trust structure, we simply put the name of the income earning assets into the name of the Trust, and can then (in any given tax year, and changing between tax years) allocate income to primary care giver first, ensure that we maximize our net earnings.

We can also allocate $3,000 per year to each child, without paying any tax on that income.

You should be able to see the effectiveness of the Family Trust structure, in building and maintaining the financial well being of your family.

Setting up the Family Trust...


Setting up the Family Trust was quite similar to setting up an SMSF, in the it consisted of:

• Creating the Trust Deed document, which, amongst other things, contained the list of Trustees (the people that control the Trust), the list of Beneficiaries (the people that benefit from the Trust).
• Getting ABNs and TFNs for the Trust
• Setting up bank accounts in the name of the Trust.
• Moving existing assets into the name of the Trust.

I'm not about giving financial advice, but I would think that the Family Trust structure would be useful to me if I were in any of the following circumstances:

• Had over $100,000 in funds to manage.
• Had family members that were either temporarily or permanently in lower tax brackets.
• Had at least one child, although the more the better.

Actually, that really only covers of the "maximizing net returns" aspect.  I would also consider setting up a Family Trust structure if I had relatives that were incapable of managing their financial affairs, for example, due to illness or general incompetence.  In any case, I would definitely speak to my accountant about the appropriateness of setting up a Family Trust.

The cost of setting up the Family Trust was about the same as the SMSF, ie, a few grand, but it is definitely worth it.  I may be wrong, but I doubt it.  :-)