Set up a trust fund for your family members with the help of an accountant from Wilson Porter.

Can an accountant set up a family trust?

Considering the best ownership structure can help prepare for the future of your assets. This article will explore the benefits and disadvantages of a family trust so you can better understand if this is the best asset management system for you.

A trust fund for your family can set up the next generation for success and financial freedom.A trust fund for your family can set up the next generation for success and financial freedom.

What is a family trust?

Broadly, a trust is an arrangement where one party (the trustee) is obliged by law to hold assets for the benefit of another party (the beneficiary). In Australia, a family trust is a discretionary arrangement where the trustee has the discretion to distribute income to different beneficiaries as it sees fit. This contrasts with a fixed or unit trust which has predetermined beneficiaries who receive the trust's income. Family trusts are usually set up to hold a family's assets or conduct a family business. Generally, they are established for asset protection or tax purposes.

Setting up a family trust account

You begin by identifying who the trustees will be. They can either be individuals or corporate entities.  The trustees are responsible for the operations of the trust and remaining compliant with the law. You can appoint any number of trustees to hold responsibility.

Next, the trustees will agree on who will benefit from the assets of the trust — known as beneficiaries. Beneficiaries do not have immediate access to the trust property and can not make any changes to the arrangement. How often and how much income the beneficiaries receive is completely up to the trustees.

These arrangements and details are written down and signed via a trust deed. The deed is a legal document that sets out the terms and conditions under which the family trust is established and maintained.

An integral part of establishing a family trust is the settlor. The settlor's function is to give the assets to the trustee to hold for the benefit of the trust's beneficiaries on the terms and conditions set out in the trust deed. After this has been carried out, the settlor will have no further role in the arrangement. This role is best for a third-party entity like a lawyer or accountant who has no stake in the trust.

Finally, the appointer of the trust is the one who chooses the trustees and beneficiaries of the arrangement. This person has ultimate control over the trust, but is not involved in the day-to-day details of it.

The appointer should set up a meeting where they will gather the trustees and settlor of the trust and make them aware of the arrangement and expectations. At this time, each member should accept or deny their role. Once this step is completed, the trustees will need to have the deed stamped and pay the duty (depending on the state the trust is settled in), apply for a tax file number (TFN) and open the trust bank account. 

Is family trust income taxable?

Broadly the net income of the trust is taxed in the hands of the beneficiary. The trust usually is not taxed on the income it generates, although there are some instances when this occurs.

In order to access the application of taxable losses and franking credits, the trustees must lodge a family trust election with the Tax Office. However, the trust must pass the family control test and makes distributions of trust income only to beneficiaries of the trust who are within the "family group."

The pros and cons of setting up a trust

Family trusts offer plenty of benefits such as:

  • Planning for retirement savings: To supplement superannuation funds, a family trust offers a flexible structure to accumulate wealth.
  • Asset protection: Can assist in protecting the family group's assets from the liabilities of one or more of the family members (for instance, in the event of a family member's bankruptcy or insolvency)
  • Estate planning: provides a mechanism to pass family assets to future generations.
  • Favourable tax treatment: can provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax "tax-free thresholds."

With the advantages of a family trust, it's important to know the disadvantages that could arise before entering into the agreement. Here are a few of the drawbacks to setting up this type of trust:

  • Ongoing management: A family trust is not a "set it and forget it" type of arrangement; it needs ongoing accounting and administrative management. Typically your accountant can handle this need best for the family because they offer the skills and expertise necessary to keep track of such assets.
  • Not ideal to run a business: Although it is not uncommon to use a family trust for business, there are several pitfalls to utilising the arrangement in such a way. Some faults include: the trustee must distribute any income the business makes to the beneficiaries and the trust cannot retain its profits. Secondly, the trustee is on the hook for any debts the business may incur.
  • Loss of ownership of assets: While the appointer can name the trustees and beneficiaries, once the assets are handed over, they are no longer in your name.
  • Potential tax hazards: While tax benefits are definitely an advantageous part of having a family trust fund, tax issues are not far off. Appointing an accountant for management and tax purposes is your best way of avoiding any problems with the Australian Taxation Office (ATO). 

The role of your accountant in organising your family trust

A family trust is an incredible way to build your personal wealth and that of your family. Partnering with Wilson Porter can ensure you're setting your family up for a bright financial future. Contact us for questions on anything regarding your family trust.  Reach out to a Wilson Porter family trust accountant today to get started.