Family trusts + Estate Planning
What is a family trust?
A family trust is a trust established during the lifetime of a person (“inter vivos”). Family trusts come in a range of shapes and forms, but the term usually refers to discretionary trust that has beneficiaries from a specific family, and the beneficiaries often include related entities (such as companies and other trusts) of those family members.
The only way to know what type of trust has been set up is to read the trust deed. Names of trusts can be misleading, so it is vital that all planning and discussions are based around the actual trust instrument – the deed. A trust titled a ‘family trust’ may actually be a will trust, a fixed trust, a bare trust or even a self-managed superannuation fund.
Why use a family trust?
Taxation: Family discretionary trusts provide flexibility to distribute income and capital amongst multiple persons and entities in order to take advantage of each beneficiary’s particular tax circumstances. This can result in a significant tax saving. Note this will not provide a tax saving for personal services income due to the specific tax rules around this issue.
Asset protection: The assets of the family trust are separate from the beneficiary’s personal assets, meaning that (usually) if a beneficiary is sued, or , the assets are not easily included in any proceedings thus providing an additional asset protection advantage over direct ownership. In the event of separation from a spouse, a family trust which was established prior to the relationship, and capitalised prior to the relationship, can be quarantined from the relationship assets in the event of breakdown. The Family Court does have the power to include trusts and make orders against trusts, but it is not straightforward and still an area of some contention (specific advice must be sought).
Succession planning: A family trust can be a useful long-term succession vehicle, for passing control of family assets to one or more family members, rather than giving the assets to individuals outright. They hold the family asset on trust for themselves, and their families, and the next generation/s.
Estate Planning Considerations
As assets held by a family trust (like superannuation) are not personal assets, special considerations need to be made when preparing wills and powers of attorney. Rather than gifting the assets, the focus is generally on the passing control of the trust after the present controller dies. This is through the power of appointment (appointor – the person who hires and fires the trustees, sometimes called the principal) in the trust deed and how the trust deed deals with the death or incapacity of a trustee or appointor.
It is vital to consider the above issues in your will, and also your power of attorney as many deeds do not allow an attorney to take over in the event of an appointor losing capacity.
Another important consideration is the classes of beneficiaries in the family trust. This must be reviewed in line with your overall succession plan and estate planning objectives. It may require careful amendment, as there may be capital gains tax or stamp duty implications if done incorrectly.
Another often overlooked aspect of family trusts and estate planning, is the unusual stamp duty situation in NSW upon the resignation of trustees (due to death or incapacity). If the trustee role is not carefully managed, the death or incapacity of a trustee may result in full stamp duty being payable on all of the trust’s dutiable property. This can obviously be a substantial cost.
For more information and specific, tailored advice contact our estate planning team.