Family Trust

Family Trust (Discretionary Trust)

* New amendment - trust deed can exclude foreign persons *

Let’s look at what a “Family Trust” is.

A Family Trust (also called a Discretionary Trust) is one of the most common small business structures in Australia. Unlike, say a Unit Trust, you establish a Family Trust to benefit the members of a family. Family Trusts provide families with a great deal of flexibility in sharing the tax burden among family members and protecting family assets.

The Family Trust structure is useful if your family holds capital growth or income-generating assets. Some of the key attributes of the Family Trust are:

• Prepared for asset protection purposes. It helps protect from bankruptcy and insolvency
• It is a relatively low cost and simple structure to use
• It allows you to distribute income to family members who are on low tax rates
• It allows you to “stream” income: you can distribute one type of income to one person and another type of income to another person
• Works in every state of Australia

A Family Trust can operate for up to 80 years.

The trust deed has the option of excluding a foreign person as defined in the Duties Act 1997 (NSW), Land Tax Act 1956 (NSW), Duties Act 2001 (Qld) and shall include a foreign trustee as defined in the Duties Act 1997 (NSW), an absentee person as defined in the Land Tax Act 2005 (Vic) and a foreign purchaser as defined in the Duties Act 2000 (Vic).

More questions? Feel free to start building a Family Trust and reading all the hints. You can read all the hints for free. You can go through and answer all of the questions for free. You can read the Summary for free. Only at the end of the process are you invited to purchase this document.

Checklist is not available for this document.

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Trust Name
• Trust Name
• Questions you are asked to create this document
• Good things about Family Trusts
• Family Trusts comply with Capital Gains Tax?
• Does my Family Trust work Australia wide?
• What are the costs of having a Family Trust?
• Can I trade in the Trust?
• Does Law Central arrange the stamping?
• Can my Family Trust borrow money?
• How do I transfer my assets into the Trust?
• How do I buy assets for my Family Trust?
• Asset Protection
• Is a 'Family Trust;' and 'Discretionary Trust' the same thing?
• Does this document work in my State?
Appointor
• Appointor/Guardian
• Can the Appointor be the Trustee as well?
• Do Beneficiaries need to sign the Family Trust?
Trustee
• A Human or a Company as Trustee?
• A Company as Trustee
• A Human as Trustee
• I want a back up Trustee
Foreign Persons
• What is a foreign person?
• What does this mean?
Irrevocable
• Legal Advice on Irrevocable Issue
Settlor
• Why do we need a Settlor?
• Who makes the best Settlor?
• Settlor Firm
• Do only the Trustee and Settlor sign the trust?
• When do I date this document?

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Trust Name

• Trust Name

  You can name your Family Trust whatever you like. People often use their family name. For example, if your family name is Smith, you can call your trust "The Smith Family Trust".
  
  If you are going to use this Family Trust for a special purpose then you can name it after that purpose:
  
  The "Property Development Family" Trust
  The "Smith Service" Trust
  The "McMann Family" Trust

  This hint is provided by Law Central Legal.

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• Questions you are asked to create this document

  Name of Trust
  
  ............................
  
  Appointors/Guardians
  .............................
  
  Backup Appointors/Guardians
  
  .............................
  
  Trustees
  
  .............................
  
  Specified Beneficiaries
  
  ..............................

  This hint is provided by Law Central Legal.

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• Good things about Family Trusts

  There are many commercial and tax advantages. They are useful for both trading and investment:
  
  * Limited liability
  The Trustee is liable for the debts of the Trust, but is indemnified from the assets of the Trust fund.
  
  You also put a Corporate Trustee in as Trustee.
  
  We word your Family Trust so that the Settlor and potential Beneficiaries aren't responsible for the debts and other liabilities of the Trust. The Trustee is, however, subject to the common law fiduciary duties and state trustee law.
  
  * Confidentiality of trading results
  A Trust (including a Discretionary Trust) is not subject to the over regulation that companies suffer. Apart from lodging a tax return (which is confidential) no one knows your business. Compare this to a Company. A Company each year has to provide confidential information about itself. Some of that information is searchable and in the public domain. People regularly search these public records looking for information about you.
  
  * "split" income
  The Trustee has complete and unfettered discretion as to which beneficiary or beneficiaries receive a share of the income of the Trust.
  
  * The Trustee or a Director of a Corporate Trustee goes broke
  What if a director of the Corporate Trustee goes bankrupt? What if the Corporate Trustee becomes insolvent? As Appointor you appoint a new Trustee.
  
  * Ability to distinguish between income and capital Beneficiaries.
  This is another great tax saving power. One beneficiary may want a capital gain (to offset his capital loss). Another beneficiary may have a low income and can take income without paying much tax. We draft your Family Trust so that the Trustee can pay capital to one beneficiary and income to another.
  
  * Attribution of different income classes
  Our Trust Deed provides for the "attribution" of different classes of income and capital. A distribution of a class of income (like franked dividends) can be made to one Beneficiary. The Beneficiary gets with that money the "attributes" of that particular class of income flowing through. A Company can't do this.
  
  * Death duties
  Your assets stay in your Family Trust when you die. This avoids Capital Gains Tax and state duty (if any).

  This hint is provided by Law Central Legal.

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• Family Trusts comply with Capital Gains Tax?

  Do your Family Trust deeds comply with the Capital Gains legislation?
  
  Yes. The deeds do comply with all the state and federal laws.

  This hint is provided by Law Central Legal.

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• Does my Family Trust work Australia wide?

  Yes it does. Your Family Trust works in every State and Territory of Australia.
  
  Law Central recommends that you obtain legal and financial advice prior to purchasing property in New South Wales, Victoria and Queensland through your family trust. Read the hints on the "Foreign Person" question page.

  This hint is provided by Law Central Legal.

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• What are the costs of having a Family Trust?

  Costs:
  
  1. There is the cost to pay Law Central or a lawyer to build the Trust Deed.
  
  2. You then may be required to have to get the Deed stamped.
  
  3. The ATO doesn't charge you to get a Tax File Number.
  
  4. Your accountant will charge you to do the tax return each year.
  
  5. Unlike a Company, you don't have any incorporation or Corporation fees.

  This hint is provided by Law Central Legal.

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• Can I trade in the Trust?

  Yes, of course. The CGT Complying Family Trust allows you to do such things as purchase, sell, trade, run a business in all commercial activities (i.e., all types of property purchase/sale, share trading, business purchasing). The Trust can buy and sell shares and purchase other securities. It is great and very flexible for a family business.
  
  The Trust can do many things as well as trade. It can hold passive assets. It can buy and sell businesses. It can buy and sell shares. It can negatively, neutrally and positively gear assets.
  

  This hint is provided by Law Central Legal.

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• Does Law Central arrange the stamping?

  A document can't be lodged for stamping until it is signed. Therefore, Law Central does not arrange the lodging of any documents at the Office of State Revenue.
  
  The Deeds are prepared for the jurisdiction you are in. Therefore, if you are in NSW, you get a NSW Family Trust.
  
  Your document is completely operational as soon as you sign the Family Trust. However, you may need to stamp the document (depending on what state you are in) in due course. You may also need a Tax File Number from the Australian Tax Office and register for GST if that is what you want to do. You may need to do other things. For example, if you are going to run a restaurant then you would need certain licences. If you were going to run a fishing Company then you would need certain licences. These are all issues that a business needs to consider irrespective of which business structure they are going to use.
  

  This hint is provided by Law Central Legal.

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• Can my Family Trust borrow money?

  QUESTION
  I would like to know if Family Trusts can obtain loans from financial institutions to purchase property. If so, what kind of things do these institutions look at when assessing worthiness of the application, regarding income to the Trust, collateral, that sort of thing?
  
  ANSWER
  The Trustee of the Family Trust is certainly able to apply for loans from banks – and often do. For example, Brett Smith can seek to borrow money in his own name. Also “Brett Smith as Trustee of the Smith Family Trust” can seek to borrow money on behalf of the Trust.
  
  The bank looks to two things: “security” you put up and your “ability to repay”.
  1. Security (capital)
  Does the Trust have good assets in it? Does the Trust have real estate over which the bank can take a mortgage? If not can “a friend” act as guarantor and can that friend provide good security? The bank may not care about security if the loans are small – like a credit card with only $10,000 on it. If the loan is big, say $100,000, then the bank will want good security in case the Trust can’t pay back the debt.
  2. Trusts ability to repay (income)
  Does the Trust operate a successful business? Does the Trust rent out properties and get a good income from that rent? How will the Trust be able to meet the loan repayments? If the Trust hasn’t got much of an income can someone else, even the Trustee, offer to go as guarantee?
  

  This hint is provided by Law Central Legal.

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• How do I transfer my assets into the Trust?

  To transfer real estate that you currently own into your Trust, you complete a Transfer form, pay the state duty and then lodge it at the local titles office in your home State.
  
  The seller might be "John Smith". The acquirer may be "John Smith as Trustee of the Smith Family Trust". In this instance you may be better off doing a Declaration of Trust, stamping that and then lodging a caveat over the property to show that the new owner is the Family Trust and no longer you.
  
  However, be careful. There will be a lot of state duty to pay. For example, if the state duty rate is, say, 6% (it is different in every state - but always very high) then you will be paying a lot of money. You may also need to pay Capital Gains Tax on the disposal from your family member to your Trust. Whenever a property goes from one person to a Trust, you generally get caught with both state duty and Capital Gains Tax.
  
  State duty and Capital Gains Tax may not make it worth it.
  
  Instead you may want to consider buying future assets for the Trust. See another hint on this.
  
  

  This hint is provided by Law Central Legal.

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• How do I buy assets for my Family Trust?

  Let’s say that “John Smith Pty Ltd” is Trustee of the “John Smith Family Trust. If that Company wants to buy some assets for the Family Trust, then on the purchase form or the offer deed you must state:
  
  Purchaser: John Smith Pty Ltd as Trustee for the John Smith Family Trust.
  If you don’t disclose this, the Australian Tax Office and Office of State Revenue may well inflict additional taxes onto you when you then try and transfer it to the Family Trust.
  
  If the Trust has no money to buy that asset then a “friend” (it can be the Trustee, a Beneficiary or, in fact, any kind soul) can either lend or gift the money to the Trust for the Trust to buy the asset.
  

  This hint is provided by Law Central Legal.

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• Asset Protection

  The Family Discretionary Trust is also one of the best ways to protect assets.
  
  If the Trust goes "down" then you generally only lose the assets in the Trust. Therefore, don't mix high risk assets with low risk assets. For example, if you had a low risk asset (shares) you wouldn't contaminate them by also putting business assets in the same Trust.
  
  If your Trust owns a property and the Trust is renting it out, then this has some risk attached to. It isn't as risky as running a full blown business but it also isn't as safe as owning shares.
  
  Our Trusts are designed for asset protection.
  

  This hint is provided by Law Central Legal.

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• Is a 'Family Trust;' and 'Discretionary Trust' the same thing?

  Yes, they are the same type of Trust.
  
  They are also called 'Family Discretionary Trusts'. At Law Central Legal we tend to call them 'Discretionary Trusts'. This is because you have the discretion every year to distribute to different people.
  
  The public tend to call them 'Family Trusts' because they are ideal for Mum and Dad. They are not by themselves generally used for more than one family.
  
  The Australian Tax Office allows you to take up a 'Family Trust election'.This is where you reduce your Beneficiaries down from 1,000s to just the immediate family. This allows you to do things like carry forward large losses - but to a large extent it destroys the value of a Family Trust.
  
  

  This hint is provided by Law Central Legal.

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• Does this document work in my State?

  Yes, this is a national document. It works in every State and Territory of the Commonwealth of Australia.
  
  Law Central recommends that you obtain legal and financial advice prior to purchasing property in New South Wales, Victoria and Queensland through your family trust. Read the hint hints on the "Foreign Person" question page

  This hint is provided by Law Central Legal.

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Appointor

• Appointor/Guardian

  You can have as many Appointors/Guardians as you want. Most people just appoint themselves as Appointor/Guardian and their spouse as backup Appointor/Guardian.
  
  The Appointor can dismiss the Trustee at any time.
  
  The Guardian has certain powers contained in the trust deed whereby the Guardian's approval is required before the Trustee can:

  1. appoint and remove a beneficiary; and
  2. vary the trust deed.
  
  

  This hint is provided by Law Central Legal.

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• Can the Appointor be the Trustee as well?

  Can the Appointor be the Trustee as well?
  
  
  Yes, of course. Both the Appointor and Trustee can wear both hats. They can be the same person or persons.

  This hint is provided by Law Central Legal.

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• Do Beneficiaries need to sign the Family Trust?

  Do all of the Beneficiaries need to sign the deed?
  
  The only people to sign Family Trusts are:
  
  1. the Settlor. The Settlor just gives you the settled sum to start or prime the Trust; and
  
  2. the Trustee(s).
  

  This hint is provided by Law Central Legal.

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Trustee

• A Human or a Company as Trustee?

  You can have either a Human Trustee or a Company Trustee. You can also have both. You can nominate (i) yourself, (ii) your spouse and yourself, or (iii) your Company, as Trustee. You could nominate yourself and your Company as Trustee - but why would you bother?
  
  The Trustee holds the Trust Assets in the Trustee's name as the legal owner for the benefit of the Beneficiaries. The Trustee also deals with the day-to-day running of the Trust for the benefit of the Beneficiaries. The Appointor can appoint or dismiss the Trustee at any time, as he/she controls the Trustee and the Trust. You can be both the Appointor and the Trustee.
  
  The Trustee is primarily liable for the debts of the Trust. Although he is to be indemnified out of the trust fund he will be liable for any deficiency where the debts exceed the value of of the trust fund.
  

  This hint is provided by Law Central Legal.

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• A Company as Trustee

  Select the "Corporate" button at the top of the page.
  
  Put in the full name of the Company. For example, "Smith Enterprises Pty Ltd".
  
  Type in the ACN (Australian Company Number).

  This hint is provided by Law Central Legal.

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• A Human as Trustee

  Select the "Human" button.
  
  Put in the human's full name and address.

  This hint is provided by Law Central Legal.

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• I want a back up Trustee

  Please do not put in back up Trustees.
  
  The Appointor has the sole right to decide who the Trustee will be from time to time.
  
  Don't put in back up Trustees. Yes, you will need back up Appointors but not back up Trustees.
  

  This hint is provided by Law Central Legal.

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Foreign Persons

• What is a foreign person?

  “Foreign Person” means a foreign person as that term is defined in the Duties Act 1997 (NSW), Land Tax Act 1956 (NSW), Duties Act 2001 (Qld) and shall include a foreign trustee as defined in the Duties Act 1997 (NSW), an absentee person as defined in the Land Tax Act 2005 (Vic) and a foreign purchaser as defined in the Duties Act 2000 (Vic).

  This hint is provided by Law Central Legal.

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• What does this mean?

  New South Wales, Victoria and Queensland have all passed legislation that imposes duty surcharges in relation to the purchase of certain property within these states by a foreign person. Legislation in New South Wales and Victoria also imposes a land tax surcharge.
  The definition of a 'foreign person' in the legislation has been broadly drafted so that it can include the beneficiaries of a discretionary trust.
  By answering 'yes' to this question, you will exclude from the class of beneficiaries of the trust any foreign person. This means that the foreign person cannot receive a benefit or receive any income, property or capital from the trust.
  The legislation and the surcharge vary between the different states. We recommend that you obtain legal and financial advice as to the effect of this issue on your discretionary trust and any investments.
  

  This hint is provided by Law Central Legal.

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Irrevocable

• Legal Advice on Irrevocable Issue

  We recommend that you obtain legal advice on whether you require the clause excluding foreign persons from being a beneficiary or receiving a benefit from the Trust to be irrevocable for your personal circumstances.

  This hint is provided by Law Central Legal.

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Settlor

• Why do we need a Settlor?

  The Settlor is the person who legally creates the Trust.
  
  All the Settlor does is sign the Trust Deed and gives the Trustee the settled sum (e.g. $10). The settled sum merely starts the Trust.
  
  Important
  It is important that the settled sum is paid at the time the trust deed is executed. Proof of payment of the settled sum should be retained by the Trustee. Sometimes this proof of payment is required to prove the validity of the trust.

  This hint is provided by Law Central Legal.

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• Who makes the best Settlor?

  Appoint people that aren't part of your family. Don't appoint your family members as Settlors. This is because the Settlor can never be a Beneficiary of the Trust.
  

  This hint is provided by Law Central Legal.

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• Settlor Firm

  If the Settlor is your Lawyer, Accountant or Adviser, they have the option of putting in their business name.
  
  E.g.
  
  Smith Accountants, CPA
  

  This hint is provided by Law Central Legal.

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• Do only the Trustee and Settlor sign the trust?

  That is correct.
  
  No one else signs the Trust.
  
  Only the Settlor and Trustee(s) sign the Family Trust Deed.
  

  This hint is provided by Law Central Legal.

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• When do I date this document?

  You date your Family Trust immediately after it has been signed and witnessed.
  
  You just handwrite in the date yourself.
  

  This hint is provided by Law Central Legal.

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This document has been prepared by the law practice Law Central Legal

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