Using trusts to manage family wealth

Trusts are a type of tax structure that can enable family wealth to be managed and preserved over several generations. They are useful if your family holds capital growth or income-generating assets, as they can provide a great deal of flexibility in sharing the tax burden among family members and also in protecting family assets.

Trusts can be of key assistance if there are concerns about any future beneficiaries’ ability to manage their financial affairs due to spendthrift behaviour, uncertain health, addiction or emotional vulnerability.

Two main types of trusts are commonly used:

1. Testamentary trust – set up through a directive left in a will, and doesn’t take effect until after the will-maker’s death
2. Discretionary trust – set up by a ‘trust deed’, which commences during the life of the individual(s) establishing the trust.

Both types of trusts allow for income and capital to be flexibly distributed to beneficiaries, while the beneficiaries have no legal entitlement or interest in the trust’s property until the trust deed declares it so.

The trustee is the legal owner of the trust property, and is responsible for managing the trust fund on behalf of the beneficiaries. The trustee has a legal duty to obey the terms of the trust deed and to always act in the best interests of the beneficiaries. A trust can operate for up to 80 years in Australia, though it is common to have a clause within the trust deed to allow the trustee the option to wind it up earlier if considered appropriate.

Benefits of using trusts to manage family wealth

• Protection of assets: Under certain conditions, family assets may be protected from creditors in the event of bankruptcy or insolvency.
• Cost: For a straightforward structure, the costs of establishment are relatively low. Specialist advice should be sought for more complicated family scenarios.
• Effective family tax management: Income can be directed to members of the family on lower tax rates. It also allows different types of income to be directed to different family members.
• Simplified regulation: Trusts are less complicated than operating a company structure.
• Tailoring: Most modern day trust deeds are flexible in their operation and can often cater for a wide variety of beneficiary classes and investments.
• Geographical flexibility: A trust established under Australian law can operate effectively in every Australian state. Where potential beneficiaries live overseas, specialist advice should be sought to determine the optimal structure.

Using trusts as a method of managing your family’s wealth can provide more certainty in how your assets will be dealt with after your death. While you won’t be physically present to oversee the management of the trust itself, you will have some peace of mind that your loved ones will be looked after financially.

Please contact this office for more information.