You may think family trusts are only accessible to the mega rich or something purely for business owners.
But if you’ve got a decent income and are a savvy saver with money to invest, it could be an effective way to lower your tax bill and protect your family’s assets.
“You don’t need to be a multi-millionaire to benefit out of it, but you need to be earning a reasonable amount,” accountant Ben Meeke, founder of Financially Free Accounting, told The New Daily.
“You need to have some reasonable savings and be looking to invest those savings.”
What is a family trust?
You can picture a family trust as a basket that holds assets like investment properties, term deposits and shares.
All the assets in the basket are the property of the trust, controlled by the trustee for a beneficiary or beneficiaries.
If you decide to set up a family trust, you can become the primary beneficiary, and secondary beneficiaries can be your parents, children, grandchildren, siblings, nieces and nephews.
Family trusts are also called discretionary trusts, which means the trustee (who can be the same person as the primary beneficiary) can decide how the money within a trust is distributed among the beneficiaries each year.
To inject some cash into the trust so that it can start investing and generating wealth, you can gift some of your savings to the trust.
But you can’t have your wages as an employee directly paid into the trust by your employer.
How can it protect my assets?
Mr Meeke said family trusts are usually established to protect assets and can help move them from one generation to another.
Any assets held in a family trust will not form part of a deceased estate, which means they can help protect assets from challenges to a will.
But it’s worth nothing that this is a complex area and individual circumstances are best discussed with a solicitor.
If set up correctly, the assets are also protected from bankruptcy or business failure (assuming the business is not trading in the same trust), because the assets of the trust belong to the trust and not the individual beneficiaries, so they can’t be used to pay the creditors of individual beneficiaries.
How will it help me pay less tax?
If you want to lower your tax bill, you could gift savings to the family trust so that future income generated from those investments could be distributed to an adult beneficiary on a lower tax rate than you.
But wait, is there a catch?
There are costs associated with establishing and maintaining a family trust, so it will only be worth your while if you have a decent amount of savings to invest.
Also, any income earned by the trust that is not distributed is taxed at the highest marginal tax rate.
Mr Meeke said it was also important to be aware that anyone receiving Centrelink payments, such as the age pension, could have their benefits reduced if they received distributions from a family trust.
“It’s not something that anyone and everyone can get benefit out of,” he said.
It can also be difficult to run the trust when there is a family fallout.
For an extreme example, look no further than the feud over the multibillion-dollar trust set up by mining magnate Gina Rinehart’s father, Lang Hancock.
Ms Rinehart’s four children were involved in a long-running dispute over the $5 billion trust.
How do I set one up?
A lawyer draws up a trust deed and the trust needs to be registered for an ABN and tax file number.
The trust must file annually with the ATO, and declare its income and how it has been divided between beneficiaries.