Introduction to Family Trusts: Part 1

A trust is a mechanism that is widely used for investment, business planning and the management of the financial affairs of families. A trust can also be effective in structuring family assets or businesses for protection against liability as well as to share income for tax benefits.

What must a trust contain?

There are several trust structures, each being specific for a given purposes. However, each trust must contain the following:

  1. A Trustee – the legal entity (person or company) that holds the trust property for the benefit of the beneficiaries. Under trust law, trustees are:

    -Personally liable for the debts of the trusts they administer; and

    -Entitled to be indemnified out of the trust property for liabilities incurred in the proper exercise of the trustee’s powers.

Under tax law, the trustee is responsible for managing the trust’s tax affairs.

2. A Beneficiary or Beneficiaries – the person/s that are the ultimate owner/s of the trust property and for whom the trust property is held.

3. Trust Property – for example real estate, shares, money, intellectual property.

When are trusts used?

A family trust is a discretionary trust that is generally established by a family member for the benefit of members of the family group. A family trust can be made:

  • where there is a family business;

  • to hold family assets;

  • to pass family assets to future generations;

  • for tax purposes;

  • to protect assets; and

  • to avoid challenges to a family member’s Will.

How are family trusts established?

A family trust is established by a Trust Deed. This deed will contain specifics of the trust, its purpose, and its terms and conditions under which the family trust will be maintained.

Once the trust deed is prepared, the family trust property must be settled by a ‘settlor’ signing the trust deed. 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. This process is a formality after which the settlor has no further involvement in the trust. 

After the trust deed is signed by the settlor, the trustee must hold a meeting agreeing to their appointment as trustee of the trust and to be bound by the terms and conditions of the trust deed.

Once the trust deed is signed, it is then submitted to the relevant State’s revenue office for payment of applicable stamp duty and stamping. Although, stamping is not required in certain States in Australia, it is required in States such as New South Wales and Victoria. Stamping will need to be done within the relevant time limits and penalties apply for late stamping.

The above are some basic steps involved in setting up and registering a family trust.

In following articles, we will discuss concessions available to family trusts and how Family Trust Elections (FTEs) are made.

By Oguzhan Sheriff.
Director at RSG Lawyers and Associates.

Ph: 03 9350 4440

Footnotes available on request.

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