Why Consider Using a Family Trust?

31 Dec

When planning how to manage and protect your wealth, you may hear the term family trust mentioned quite often. But what exactly is a family trust, and why might someone choose to use one?

Let’s break down the basics of family trusts and explore some common reasons why people use them — including a practical example and a tax comparison to highlight the benefits.

What Is a Family Trust?

A family trust is a legal structure that holds assets on behalf of beneficiaries — usually members of the same family. Instead of owning assets personally, the trust “owns” them, and the trustee manages these assets according to the trust deed’s rules and for the benefit of the beneficiaries.

Why Use a Family Trust?

Flexible Income Distribution: Allows income to be distributed to different beneficiaries each year, often to reduce overall tax.
Asset Protection: Protects assets from creditors or legal claims against individual family members.
Estate Planning and Succession: Helps pass wealth to future generations according to your wishes.
Capital Gains Tax Planning: Gains can be allocated to beneficiaries in lower tax brackets.
Control Over Assets: Trustees manage assets according to your instructions.
Investment Flexibility: Can hold shares, property, business interests, and more.

Practical Example: Holding Shares in a Family Company

Consider a family trust set up by parents who own shares in their private company. The trust holds the shares instead of the parents holding them personally.

Family Trust

Role/Asset: Holds 100% of shares in Family Company
Purpose: Central ownership of business assets

Family Company

Role/Asset: Operates the family business
Purpose: Generates profits

Beneficiaries

Role/Asset: Children and parents
Purpose: Receive income distributions from the trust

Tax Comparison: Holding Shares Personally vs. Holding Shares in a Family Trust

Scenario Assumptions:

The company pays $100,000 in dividends in a year.
The individual is in a high tax bracket (47% including Medicare).
The family trust can distribute income to beneficiaries with varying tax rates.
Capital gains tax (CGT) concessions may apply differently.

Shares Held Personally

Dividends received are taxed at the individual’s marginal tax rate (less franking credits).
Example: High-rate taxpayer pays ~$30,000 tax on $100,000 dividend.

Shares Held via Family Trust

Trust distributes income to beneficiaries, who pay tax at their own marginal rates. Franking credits pass through.
Example: Income split, e.g., $60,000 to lower-rate beneficiary (19%), $40,000 to higher-rate (47%). Total tax might be ~$20,000.
CGT on sale of shares can potentially be minimised by distributing gains to lower-rate beneficiaries.

Simplified Example — Dividend Taxation

Individual shareholder (personal holding): $100,000 dividend, 47% tax → ~$30,000 payable
Beneficiary 1 (low tax rate): $60,000 dividend, 19% tax → ~$8,000 payable
Beneficiary 2 (high tax rate): $40,000 dividend, 47% tax → ~$12,000 payable
Total via Family Trust: $100,000 dividend → ~$20,000 tax

Note: Tax payable is net of franking credits and simplified for illustration.

Why This Matters

Personal Holding: Income and capital gains flow directly to the individual shareholder and are taxed at their personal rate — potentially high for top earners.
Family Trust Holding: The trust provides flexibility to allocate income and gains to beneficiaries with lower tax rates, reducing the overall tax paid by the family group.

Things to Consider

Family trusts are complex and require proper setup and administration. Legal and tax advice is essential to ensure they’re appropriate and compliant.

A family trust can provide flexible income distribution, asset protection, and help with succession planning, especially when holding assets like shares in a family company. Understanding how trusts work and the benefits they offer can help families make informed decisions about their wealth.

If you want to explore whether a family trust fits your situation, speak with a qualified professional.

Disclaimer: This blog is for informational purposes only and does not constitute financial or legal advice. Please consult a professional advisor for advice tailored to your personal circumstances.