18,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Ratgeber
- Sprache: Englisch
Discover clear and practical steps to confidently establish and manage a family trust
Family trusts can be a game-changer for protecting your assets, managing your wealth and securing your family's financial future—but they're often misunderstood. Family Trusts: A Plain-English Guide for Australian Families cuts through the complexity, simplifies legal and financial processes, and offers clear explanations and advice that you can really use.
This book will help you decide if a family trust is right for you, then provide simple steps that enable you to make informed decisions and confidently engage with advisers. Fully updated to reflect current laws and legislation, this sixth edition is essential for navigating the modern finance and taxation landscape.
Inside, you'll discover how to:
- Evaluate trusts: Weigh the advantages and disadvantages to determine if a trust is right for you—and identify alternative strategies
- Navigate tax and social security: Understand tax obligations, capital gains and how trusts impact benefits
- Protect your assets: Help safeguard against creditors and bankruptcy using strategic trust structures
- Tailor your trust: Explore discretionary trusts, unitised trusts and philanthropic uses, with the help of practical case studies
This expertly written guide includes updates on trustee qualifications, hybrid trusts, non-resident beneficiaries, and key legislative changes. It is a must-have resource for anyone looking to preserve their family's prosperity for generations to come.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 405
Veröffentlichungsjahr: 2025
Ähnliche
Table of Contents
Cover
Table of Contents
Title Page
Copyright
About the authors
Preface
Chapter 1: The concept of a trust
Types of trusts
Beneficiaries
Trust deed
Legal entity aspects
The parties to a trust
Wills and trusts compared
Other preliminary points
Terminology
Chapter 2: Modern family trusts — advantages and disadvantages
Fundamentals of family trusts
Advantages of family trusts
Disadvantages of family trusts
Chapter 3: Types of family trusts
Discretionary trusts
Unitised family trusts
Family discretionary trust
Chapter 4: The trustee
Types of trustees
Multiple roles of trustees
Training for trustees
Attributes of an ideal trustee
The problem of succession
Trustee duties
Can anything go wrong?
Chapter 5: Administrative aspects of a trust
Roles of the trust deed
Drawing up a trust deed
Winding up a trust
Chapter 6: Income tax as it relates to trusts and trust distributions
The basis of taxing trusts
Trustee resolutions
Beneficiary loan accounts
Related‐party loan accounts
The meaning of ‘income’
Franked dividends
Dividend reinvestment plans
Capital gains
Deductions
Items keep their character
Losses
Information required by beneficiaries
Annuities
Personal exertion income
Family trust elections
Personal services income
Corporate trustees
Non‐resident beneficiaries
Bamford
Income streaming
Accounting for dividends
Chapter 7: Capital gains tax
CGT assets
Calculating the capital gain
Assets left by will or intestacy
CGT and gifts
Scrip for scrip
Transfers of assets
Trust asset distributions
Trust capital gains distributions
Revenue losses
Share traders
Chapter 8: Taxation of family trusts
Tax savings
Corporate beneficiaries
Superannuation fund beneficiaries
Child beneficiaries
Spouse threshold
Undistributed income
Deceased estates
Taxes paid by the trustee
Distributions in kind
A comparison
The taxation of unitised trusts
Capital distributions
Redemptions
Undistributed capital gains
Gifts
Other tax issues
Self‐assessment
Tax file numbers
Tax years
Tax losses
Trading in trust losses
Small business
The source of capital payments
Tax‐exempt components of distributions
Tax avoidance measures
Revenue aspects
Undistributed income
An update on income streaming
Tax reform
A major change is in the wings
Chapter 9: The family discretionarytrust
How it works
Family trust distribution tax
Trust losses
Setting up a business
The benefits of a corporate entity as trustee
A final word of caution
Chapter 10: Trust accounting
Laying the foundation
Cash or accrual?
Let's talk business taxes and charges
Away we go
Accounting for your income and expenses
Distribution of your business income (profit)
It's all about tax minimisation
Chapter 11: Social security
Means tests
Eligibility for age pension
Assets test
Drawbacks
Married couples
Income
Gifts received
Borrowings
Marginal rate of abatement
Trust income
Deeming
Financial investments
Assets
Deprivation
Differences from tax law
Home improvements
Changed circumstances
Income tax aspects
Trustee aspects
Private trusts and private companies
Multiple counting in the assets test
Pension earnings statements
Special disability trusts
Appeals
Chapter 12: Investment decisions
Spread
Managed funds
Deposits
Ordinary shares
Property
Two caveats
Scams and shams
Chapter 13: Other types of trusts
Alternatives to family trusts
Trusts for children with a disability
Charities and philanthropic trusts
Chapter 14: Other issues to consider
Reverse mortgages
Other family issues
Ownership aspects
Timing: starting a trust
Timing: disposing of trust assets
Setting up a family trust by will
Looking at the whole scene
The regulation of trusts
Appendix A: Appendix AWills and trusts compared and contrasted
Appendix B: Appendix BDifferences between trust deeds and powers of attorney
Appendix C: Appendix CTax rates 2024–25
Glossary
Index
End User License Agreement
List of Tables
Chapter 13
Table 13.1 examples of inter vivos gifts
1
Table AA1 comparison between wills and trusts terms
Table AA2 comparison between wills and trusts
2
Table AB1 differences between a trustee and an attorney under power
3
Table AC1 tax payable on income for resident individuals
Table AC2 tax payable on minors' unearned income
Table AC3 tax payable on Australian‐sourced income for foreign residents...
Table AC4 tax payable on Australian‐sourced income for working holidaymakers...
Guide
Cover
Table of Contents
Title Page
Copyright
About the authors
Preface
Begin Reading
Appendix A Wills and trusts compared and contrasted
Appendix B Differences between trust deeds and powers of attorney
Appendix C Tax rates 2024–25
Glossary
Index
End User License Agreement
Pages
iii
iv
vii
viii
ix
x
xi
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
221
222
223
225
226
227
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
253
254
255
256
257
258
259
260
261
This sixth edition first published 2025 by John Wiley & Sons Australia, Ltd.
© 2025 John Wiley & Sons Australia, Ltd.
First edition published by Wrightbooks (an imprint of John Wiley & Sons Australia, Ltd.) in 1997. Second edition published by Wrightbooks in 2001. Third edition published by Wrightbooks in 2004. Fourth edition published by Wrightbooks in 2007.
© N.E. Renton 1997, 2001, 2004, 2007
Fifth edition published by Wrightbooks in 2014.
© N.E. Renton & TPA Business Solutions 2014
All rights reserved, including rights for text and data mining and training of artificial intelligence technologies or similar technologies. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review) no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise. Advice on how to obtain permission to reuse material from this title is available at http://www.wiley.com/go/permissions.
The right of N.E. Renton and R. A. Caldwell to be identified as the authors of Family Trusts (6th edition) has been asserted in accordance with law.
ISBN: 978‐1‐394‐33800‐9
Registered Office
John Wiley & Sons Australia, Ltd. Level 4, 600 Bourke Street, Melbourne, VIC 3000, Australia
For details of our global editorial offices, customer services, and more information about Wiley products visit us at www.wiley.com.
Wiley also publishes its books in a variety of electronic formats and by print‐on‐demand. Some content that appears in standard print versions of this book may not be available in other formats.
Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty
While the publisher and authors have used their best efforts in preparing this work, they make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives, written sales materials or promotional statements for this work. This work is sold with the understanding that the publisher is not engaged in rendering professional services. The advice and strategies contained herein may not be suitable for your situation. You should consult with a specialist where appropriate. The fact that an organisation, website, or product is referred to in this work as a citation and/or potential source of further information does not mean that the publisher and authors endorse the information or services the organisation, website, or product may provide or recommendations it may make. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
Cover design by Wiley
Internal permissions: Tables AC1, AC2, AC3 and AC4 © Australian Taxation Office for the Commonwealth of Australia. The ATO material included in this publication was current at the time of publishing. Readers should refer to the ATO website www.ato.gov.au for up‐to‐date ATO information.
About the authors
Nick Renton (1931–2010)
Nick was a consulting actuary, commercial arbitrator, company director and writer. Born in 1931, he qualified as a Fellow of the Faculty of Actuaries in 1957 and was a Fellow of the Institute of Actuaries of Australia. He was a licensed investment advisor and qualified commercial arbitrator. In 1975 he was elected a Fellow of the Securities Institute of Australia for his services to the industry.
After 15 years as Principal Officer of a life insurance company Nick became the first Executive Director of the Life Offices’ Association of Australia in 1975. He was Executive Director of the Life Insurance Federation of Australia from its formation in 1979 until 1986. In those capacities he acted as the official spokesperson for the life insurance industry.
Nick went on to work as an independent business consultant to leading stockbrokers, insurance companies, employer organisations, government agencies and others. He served on the boards of several financial institutions and was in great demand as a speaker at seminars and conferences.
He was the founder and first president of the Australian Shareholders’ Association, federal president of the Australian Society of Security Analysts and Victorian chairman of the Commercial Law Association of Australia.
Nick Renton was published widely in Australia and the United States. He wrote on more topics than any other Australian author, including more than 60 published books covering shares, property, managed investments, taxation, wills, good writing, public relations, the internet and the Australian economy, as well as numerous papers to professional bodies. He also published nearly 600 articles in newspapers and financial journals, presented papers to conferences of linguists and contributed to a textbook on journalism.
In 1992 he was awarded the prestigious H M Jackson Memorial Prize for two of his works, Understanding Dividend Imputation and The Retirement Handbook. In 1995 he received the Ken Millar Award for his best‐selling Understanding the Stock Exchange and his highly controversial Company Directors: Masters or Servants?
Rod Caldwell
This revision is co‐authored by Rod Caldwell. Rod is a tax accountant with postgraduate qualifications in taxation. He spent 15 years with the Australian Taxation Office (ATO), where he was a tax advisor in a centre of excellence, recognised by CPA Australia as a tax specialist and awarded Fellow status. He left the ATO in 2005 to try his hand at teaching. Rod has lectured and tutored in taxation and management accounting at a number of Australian universities including Monash University, University of Western Australia and Edith Cowan University, as well as teaching business studies at the diploma and advanced diploma level at a number of TAFE colleges in Western Australia. His first book was published by Wrightbooks in 2004. He is the author of Taxation for Australian Businesses, Learn Small Business Accounting in 7 Days andLearn Bookkeeping in 7 Days.
Preface
Despite the technical‐sounding title, this very practical book will help ordinary families and small business proprietors to understand the concepts underlying a very useful legal device, the family trust. It will help them to arrange their financial affairs in better ways, taking into account current conditions and their own particular circumstances.
It will explain in lay terms what the legal device known as a trust, whose origins date back to Tudor England, means in this modern age. It will alert readers to both the advantages and the disadvantages of setting up a family trust. After all, many trusts are intended to last a long time and involve a permanent alienation of assets. And even if they start off in a fairly small way, they can grow over time to handle quite large sums. So, getting things right in the first place is critically important.
It also explores a number of fundamental questions raised by those involved in family trusts and sets out to answer them comprehensively. The topics covered include the qualifications needed by trustees, hybrid trusts, the risks of borrowing by trustees, non‐resident beneficiaries, minutes of meetings, resettlements, the protection of assets against creditors, bankruptcy and divorce.
As an example, many people consider the idea of setting up education funds for newborn children or go in for other ‘Investment' savings schemes. The idea of making adequate financial provision for the family is a common enough theme. A few distinct elements are involved here:
Firstly, money has to be put aside for this objective. In recent times, many commentators have drawn attention to the fact that Australians are not saving enough.
Secondly, any money put aside has to be invested wisely. This involves putting together a suitable portfolio of investments and avoiding vehicles that impose excessive charges.
Thirdly, and this is the subject of the present book, an appropriate legal structure needs to be employed.
Families with even modest assets need to devote some energy to managing them properly. All too often their main effort is directed towards minimising income tax and/or maximising current or potential social security entitlements. The main goal, however, should be to maximise the family's wealth, to protect its assets and to provide financial security for its members. For reasons elaborated later in this book, setting up a suitable family trust can be one significant ingredient in such a strategy.
Having explored family trusts in general we will then turn our attention to the most common form of family trust structure used in small businesses — that is, the Family Discretionary Trust where the Trustee has lodged a Family Trust Election with the Australian Taxation Office. That's a bit of a mouthful so in this book we will just call them a Recognised Family Trust. A trust itself has no legal standing; however, lodging a family trust election does give the trust a quasi‐legal status as the Income Tax Act confers onto that trust certain tax concessions and certain tax obligations in addition to those already imposed upon a standard trust. Family discretionary trusts will be discussed at length after we have analysed family trusts in general, but during the general analysis I will occasionally make reference to an Elected Family Trust where the tax obligations imposed upon them restrict what they can and cannot do.
This book will help:
those thinking about restructuring their financial affairs and looking into setting up a family trust as one option, and whether or not to lodge the family trust election
current and potential beneficiaries under a trust who want to know what their rights are
current trustees who want to understand their duties and powers
those charged with choosing new trustees who wish to consider what qualities such appointees should have
persons invited to become trustees of existing funds who wish to know exactly what their obligations would be.
The information and alternative strategies set out in this practical book will equip families to discuss this important subject more intelligently with their solicitors, accountants, financial planners and other professional advisors.
I have made every attempt to ensure that the taxation information I have provided in this book is current up to the end of June 2024. In this endeavour I have used the Australian Master Tax Guide, Tax Year‐End 2024, 75th edition. This book is considered to be the bible of the tax world.
Chapter 1The concept of a trust
Just what is a family trust, and who should have one? The advantages and disadvantages of using a family trust structure are elaborated later in the text, but it may help to set out some background information first, starting with an analogy.
The concept of a will is better known than that of a trust. A will is a legal instrument that allows a person to nominate individuals who are to inherit that person's assets after his or her death. The will can also impose conditions in regard to any such legacies or bequests. The person making the will is called the testator, and the persons receiving the assets are known as the beneficiaries. The document also names an executor to handle the paperwork involved in distributing the assets in accordance with the law and with the testator's wishes as formally set out in the will.
Commonly, such documents appoint a person to be both ‘the executor of my will and the trustee of my estate’. Technically, the executor's role is to convert the assets to cash as required, and also to pay the debts of the deceased estate; the trustee's role follows on from that. However, in practice ‘executor and trustee’ is always viewed as a single appointment covering all facets. On the testator's death, the executor becomes the legal owner of the assets but holds them only temporarily in trust for the beneficiaries.
Trust is a technical legal term that refers to a relationship based on confidence under which property is held by, and formally vested in, its legal owner, who is known as the trustee, but on behalf of other parties who are entitled to the fruits of that ownership, the beneficiaries (or objects) of the trust.
Types of trusts
Many different types of trust exist at law. For example, superannuation funds normally involve trust arrangements, as do many charities. Solicitors, stockbrokers and other professionals use trust accounts in respect of clients’ money. Other types of trusts commonly encountered include cash management trusts and unit trusts. Generally, a purpose trust can be set up for the furtherance of a specific objective rather than for the benefit of one or more specific persons.
There are also statutory trusts created by law, for example in relation to persons unable to look after their own affairs, and there are even bare trusts, where the sole obligation of the trustee is to convey property to beneficiaries when required to do so.
A trust involves a legal obligation to hold property for the benefit of others. A donor who makes a gift by means of a trust is able to stipulate how the property concerned is to be used; such control would not apply in the case of an outright gift. This ability to impose obligations on the recipient of property makes the trust format attractive to donors who want the greatest degree of assurance that their gifts will be used as they intended.
For the purposes of this book, an inter vivos (between living people) family trust can be thought of as a similar arrangement to that provided by a will, except that it is established by a trust deed and allows a person to pass on his or her assets while still alive. It is also possible to set up a family trust by will rather than by deed. Such a trust, known as a testamentary trust, comes into existence only on the death of the testator rather than immediately a trust deed is executed. This aspect is further discussed later in the book.
Either way, the beneficiaries of such a trust are normally family members of the person instigating the arrangement. Often some selected charities are named as additional beneficiaries. The term family trust is purely descriptive rather than legal. A family trust can be, but does not have to be, a unit trust.
In the case of an inter vivos trust the legal document, which roughly corresponds to the will, is called a trust deed, or sometimes a deed of settlement or indenture. Beneficiaries can be named individually, but more commonly in a modern deed they are named as a broad category, such as ‘all the children of John Henry Smith’, or, in practice, some more elaborate version of this.
The deed can also spell out appropriate rules or conditions. The whole arrangement is really just an elaborate means of making a gift with, if desired, certain strings attached. The conditions can deal with virtually anything, but the courts do not enforce conditions that seek to impose illegal conduct or are even against public policy.
A trust created by deed is sometimes referred to as an express trust or a declared trust, as distinct from a constructive or implied trust. The latter is established by conduct, for example by opening a bank account with the words ‘as trustee for’ in its name.
Beneficiaries
With a deceased estate, the normal (although not invariable) objective is that the executor should distribute the assets to the beneficiaries as quickly as possible and then disappear from the scene. With a family trust, in contrast, the intention is usually that the arrangement should last for a long time.
The class of beneficiaries can extend to children yet to be born and to marital partners yet to be acquired. Because of this it is usually best not to specify beneficiaries individually by name unless there is a particular reason for doing so. Indeed, in some cases naming a person as a beneficiary in a trust deed might raise false expectations. Numerous variations on beneficiaries are possible. For example, siblings, cousins, half‐brothers and half‐sisters, stepchildren, adopted children, de facto spouses, ex‐spouses, same‐sex partners and grandparents can all be included or excluded, according to individual preference.
Beneficiaries do not have to be natural persons; so, for example, family companies, other family trusts, or unconnected charities and non‐profit organisations (preferably ones that have been incorporated) can also be included. Pets cannot be beneficiaries, however, although a person willing to look after a pet could be appointed instead!
It is usually desirable also to name an entity — for example, a favourite charity — as the residuary or default beneficiary, in order to cover the possibility that none of the other potential beneficiaries is alive when assets are to be distributed.
You can also set up a family discretionary trust as a registered family trust by lodging a family trust election with the ATO, which gives you access to certain tax advantages that we will discuss later. For a recognised family trust, the ATO requires you to nominate a specified person as part of the family trust election. This establishes a class of beneficiaries, being the family of this nominated person. Under the tax rules for ‘elected’ family trusts, you are prohibited from including in your family trust any person or entity outside of the family of the nominated person.
Trust deed
Generally speaking, a trust deed cannot have retrospective effect. However, a deed could be used in order to confirm in writing the details of a trust that had previously been set up verbally. A trust deed would normally name the initial trustee or trustees and set out the mechanism for filling casual vacancies and for making any additional appointments required.
Legal entity aspects
It should be noted that a trust is not a legal entity, although the goods and services tax legislation, discussed later, treats ‘business’ trusts as entities for purposes of that legislation. Unlike a company, a trust estate, or, for that matter, a partnership, is not a separate ‘person’ in the eyes of the law. (A trust estate, for this purpose, includes a deceased estate.)
This principle extends to the taxation of trusts, which is discussed in detail in the chapters devoted to taxation. From time to time changes to the basis of taxing trusts are mooted. This possibility should always be borne in mind and some flexibility built into the trust deed.
The parties to a trust
A typical trust arrangement involves a trust fund and the following parties:
The
settlor
(
grantor
or
founder
) legally creates the trust by executing (signing) the trust deed and by feeding in the initial assets of the trust fund (often only a nominal amount of cash sufficient to satisfy a legal fiction).
The
trustee
administers the trust in accordance with the deed and the law and (very often) exercises various discretionary powers. The duties and powers of a trustee are discussed in greater detail overleaf.
The
beneficiaries
are the individuals who are entitled to receive income and capital payments from the trust fund, again in accordance with the rules set out in the deed. Persons can be named as beneficiaries for income only or for
corpus
(capital) only, or for both.
In the case of some trusts, an appointor can be given the power to remove trustees, appoint additional and replacement trustees, and nominate a successor as appointor.
Alternatively, in the case of some trusts a guardian or protector can, for example, be given:
a power of veto over certain types of transactions
a power of veto over proposed amendments to the trust deed
a power to remove or appoint trustees
a right to be consulted in relation to certain investments
a power to act as arbitrator or mediator in the event of certain disputes
a power to nominate a successor as guardian or protector.
The trustee owes a fiduciary duty to both the settlor and the beneficiaries. The trustee also acts as the legal owner of the assets constituting the trust fund, in much the same way as an executor acts as the legal owner of the assets in a deceased estate. Thus, for example, bonds, shares, land and motor vehicles would be registered in the name of the trustee. Bank accounts and the like would similarly be opened and operated in the name of the trustee.
There is no restriction on the types of assets that may be held by the trust if so authorised by the deed, but the assets would not ‘belong’ to the trustee in the ordinary sense of the word. They would merely be held ‘in trust’ for (that is, for the benefit of) the various beneficiaries.
Such assets can be described as being in a trust estate instead of in a deceased estate, and the whole arrangement can be described as an inter vivos or living trust. (Note: This should not be confused with what is loosely referred to as a living will, a document dealing with the desired withdrawal of life‐sustaining medical procedures in certain circumstances.)
Wills and trusts compared
The idea behind a will is better understood than the idea behind a trust deed probably only because people know they will die one day and must therefore make a will. In both wills and trusts, varying percentages can be allotted to different beneficiaries, although naturally these percentages should add up to 100 per cent. Assets and income can be distributed separately; so, for example, under a spouse's will all the income could go to their partner during their lifetime and the capital (the corpus) could go to the children of the family in equal shares on her death. A similar approach could theoretically be used in a trust deed, but it would be more usual to set up a discretionary trust instead.
A variation of this theme is possible whereby the original owners retain an interest in their assets. Thus, a Charitable Remainder Trust could be set up with, say, the donors receiving the income for life and one or more charities acquiring the assets on the death of the last surviving donor.
In all of these circumstances the recipients of the income are called the life tenants, and those entitled to the capital are known as the reversionersor remainders. In theory, the settlor of a trust could also be one of the beneficiaries of that trust. However, such a combination would probably lack credibility and could challenge the genuine nature of the entire trust arrangement. It is therefore better to name as settlor someone who is not related to the family and who is not otherwise involved with it.
Such an approach may also be a useful form of insurance against adverse changes to the law in the future. For similar reasons it is probably better for the settlor not to be a trustee either. (Some further aspects of this theme are mentioned in chapter 2.) However, the class of beneficiaries can also include the trustee. The legal ownership of the property that the trustee holds in order to carry out the trust always remains separate from any interest the trustee may have as a beneficiary.
This separation of legal and beneficial ownership is an essential feature of all trusts. In fact, a trust automatically comes to an end if the legal and beneficial interests merge, as, for example, when the sole trustee and the sole remaining beneficiary of a trust are the same person and there is no possibility of further persons becoming beneficiaries (for instance, by being born or reaching a certain age). Persons who declare that some particular property owned by them is to be held by them in trust for someone else become both settlors and trustees.
An arrangement that might suit all concerned could involve two friends setting up unconnected family trusts for their respective families (not necessarily at the same time). One person could act as the settlor of the fund for which the friend is the trustee, with the roles being reversed for the other fund.
Some comparisons between wills and trusts are summarised in appendix A.
Other preliminary points
This book is a general guide for lay readers to assist them to better understand the ramifications of family trusts and their advantages and disadvantages. It deliberately avoids the numerous footnotes to obscure cases that are a feature of textbooks aimed at legal practitioners. However, it is not a substitute for seeking out proper professional advice tailored to the reader's individual circumstances. It should also be borne in mind that the law relating to trusts and particularly to the taxation of trusts and their beneficiaries changes from time to time.
In Australia, trust law and a number of important taxes affecting trusts, notably stamp duties and land tax, are the province of state governments. As in many other walks of life, the laws in this area, while similar, are not uniform throughout the country. However, income tax (including capital gains tax) is a function of Commonwealth legislation.
To a large extent, trust law is not found in statutes but rather is part of the ‘common law’ of the state concerned, the past decisions of the superior courts and the precedents these create. The origins of trust law were actually in ‘equity’, the body of rules formulated by the English Court of Chancery to supplement the rules, procedures and deficiencies of the common law.
For reasons discussed later, most modern family trusts are discretionary. This means that those who are to receive benefits from the trust each year and the amount each person is to receive are not specified in the deed itself. Instead, a discretion to make the decisions in regard to these and associated matters is vested in the trustee. Naturally, the recipients have to fit the categories defined in the deed and likewise the total payouts must be within the limits imposed by the deed.
A family trust can be a powerful yet flexible vehicle. Of course, the success of any family trust depends on far more than just its legal structure and the personality of the trustee. It must have adequate funds under management, and these must be invested wisely.
Terminology
For convenience, words such as executor and trustee are often used in this book in the singular. However, as explained later, it is possible, perhaps even desirable, for a number of individuals to act collectively as the trustee of a trust. The word beneficiary is, in line with custom, loosely used both for a person actually in receipt of a distribution from a trust fund and for someone (strictly speaking, a discretionary beneficiary) who is merely a member of a defined category of persons, all of whom are contingently entitled to receive such distributions.
Chapter 2Modern family trusts — advantages and disadvantages
Before looking at family trusts in today's conditions a brief scan of the past may help shed light on some of the legal niceties. Trusts are very versatile creations of the law. They date back to sixteenth‐century England. Wealthy property owners in those days frequently wanted to ‘settle’ some of their lands on their children as a mechanism to avoid the payment of death duties. A deed of settlement was a convenient device for such a purpose in that distant era.
This ancient procedure, enshrined in the common law of England (and of Australia), has with the help of some legal fictions been adapted to modern needs. The trust has become an essential part of life in those countries that use it, although somewhat surprisingly it has no legal counterpart in many other countries.
Fundamentals of family trusts
The general provisions of a deed of settlement traditionally usually included a right for the trustee to accept further assets into the trust fund, beyond those transferred at the time of the original settlement.
Death duties and gift duties no longer apply in this country. However, when death duties were originally introduced into Australia at state and federal levels (under various names) a series of anti‐avoidance provisions were also enacted. For example, gifts made by a person shortly before death were, for duty purposes, treated as not having been made at all: duty was levied on the total of the actual estate and the notional estate represented by the value of those gifts and of certain other items. In addition, a gift duty regime was imposed to complement the death duty regime. Similarly, assets that were settled on beneficiaries could be caught if the settlor retained some connection with the trust fund, such as the ability to exercise some control over it. For that reason, it became customary to have an outsider act as the settlor, with the initial settlement involving only a nominal sum such as 10 dollars.
This procedure is still widely used today, probably because it also serves to avoid some complications both under the Income Tax Act and in relation to state stamp duty, where it still applies. In particular, it helps to ensure that no additionally created documents could ever be regarded as further settlements by the original settlor.
The more substantial asset transfers envisaged by the family in setting up the arrangement are then made as gifts to the trust fund by, or as loans from, persons other than the settlor.
Typically, the settlor making the nominal initial payment is a relative or family friend. The creator of the trust then places some of their personal assets into the family trust for the benefit of their partner and children and possibly, if the trust is not a Registered Family Trust, other beneficiaries, including charities. They might also wish to act either as the sole trustee or as one of several trustees, or to have a corresponding role on the board of a company acting as the trustee.
A typical family trust
As already explained, the operations of a trust are always governed by its own trust deed. The precise wording in such a document will be influenced by the solicitor drafting it and by the wishes of those giving the necessary instructions, so theoretically every deed may be different.
However, a typical discretionary family trust would involve the following steps:
At commencement the settlor would settle certain property on the trustee, to be held in trust for the beneficiaries.
The settlor would also execute (sign) the trust deed. In the type of family trust under discussion, this would be a formal one‐off transaction in an artificially contrived but perfectly legal arrangement, with the settlor then having no further part to play and no ongoing involvement.
The duration of the arrangement would be long term, very often a maximum of 80 years, a period used to ensure compliance with a legal principle known as the rule against perpetuities that we will discuss later. The detailed conditions of the trust would be set out in the trust deed. From time to time other gifts would be made to the trustee, to be held in trust for the beneficiaries in the same way as the initial amount. During the life of the trust the trustee would distribute the income of the trust fund to beneficiaries designated by the trustee in proportions determined by the trustee.
For tax reasons such distributions would normally be made each financial year, although the deed would also permit the accumulation of some or all of the income within the trust fund.
During the life of the trust the trustee could also, if desired, pay out some or all of the capital of the trust fund to beneficiaries designated by the trustee in proportions determined by the trustee.
At the termination date the trustee would pay out the net balance of the trust fund after all liabilities had been satisfied (this balance comprising both capital and any accumulated income) to beneficiaries designated by the trustee in proportions determined by the trustee.
Various specific powers would be vested in the trustee, including the power to invest, to lend and to borrow.
Someone, called an appointor, would be given the power to remove or replace the trustee and/or to make additional appointments.
There would normally also be a limited power to amend the deed, but not with respect to rights that had already crystallised. Amendments would probably involve legal fees and could also be costly in terms of stamp duty and/or capital gains tax.
Default provisions need to be set out to cover the possibility that the trustee does not make the expected discretionary decisions. In the case of income each year, the default mechanism can be to accumulate the income (although this involves a tax liability for the trustee). In the case of capital and of undistributed income at termination, a possible formula is a distribution to primary beneficiaries as tenants‐in‐common in equal shares; primary beneficiaries are defined in the trust deed as, say, the parents and their children, as distinct from more distant relatives. Again, one or more residuary beneficiaries need to be named to cover the possibility that all the primary beneficiaries are dead.
The rule against perpetuities
The rule against perpetuities is ancient. It was originally based on a policy of not tying up feudal land and preventing its free alienation. Settlements in breach of this rule would be void, but the solicitor preparing the deed would normally ensure that it was a valid document. It is, of course, possible that the rule will one day be abolished by statute. On the other hand, 80 years is about two and a half generations, and it may be unwise to assume that what is sensible at the beginning of such a lengthy period will still be appropriate at its end.
Non‐discretionary trusts
A family trust can also be set up as a non‐discretionary trust (sometimes also referred to as a fixed trust, a specific trust or a rigid trust). For such vehicles the deed itself would spell out the specific beneficiaries and their entitlements. The role of the trustee would then be mainly administrative.
The initial amount contributed by the settlor, together with any subsequent sums accepted by the trustee under the deed, is called the settled sum. This is similar to the subscribed capital of a company. While for tax reasons it is usual for income beneficiaries to receive an absolute interest, for capital beneficiaries contingent interests are quite feasible. The contingency could, for example, be reaching a specified age or getting married.
A 'recognised’ family trust would normally not be a fixed trust, as this would run counter to the benefits of the election.
Note: The term fixed trust is also used in a quite different sense in relation to unit trusts, where it refers to trusts with share portfolios involving a certain number of specified listed companies in fixed proportions.
Source of funds
The capital an individual puts into a family trust can come from a number of different sources, such as:
an existing portfolio of investments
an inheritance
lump‐sum superannuation
lump‐sum damages
lotto winnings
the proceeds from the sale of a home or from downsizing to a smaller home
the proceeds from the sale of a farm or business
ongoing savings from personal exertion income
ongoing savings from investment income.
Such capital can be put into the trust either by way of a gift or as a loan. Both methods can have social security implications, as discussed later in the book, and loans of this kind would often be interest‐free.
Gifts versus loans
The advantages of using loan funds include the following:
There is greater flexibility for the provider of the funds should circumstances change causing that provider to need any of the funds again. This flexibility will be even more relevant if that person is not among the class of persons eligible to be beneficiaries of the trust.
The provider of the funds is still able to include them in his or her personal net assets. This may be important for that person's own borrowing purposes or for demonstrating net worth in connection with certain business licences or the like.
A change of mind can be carried through, for example, if the children for whose benefit the family trust was intended turn out to be unworthy or if they all die prematurely.
Better account can be made of changed circumstances generally.
The advantages of using gifts instead of loan funds include the fact that the assets are alienated and thus may be put out of the reach of actual and potential creditors.
The capital can be put into the trust in the form of cash or by transferring existing assets. The latter can have capital gains tax implications and except in the case of shares could also give rise to stamp duty on the market value of the assets concerned as at the date of transfer. Naturally, very little is achieved in any practical sense if a family trust is set up and then left as an empty shell without the necessary asset transfers being made.
Owner‐occupied housing
One type of asset is usually best kept out of a family trust — namely, owner‐occupied housing. Such housing is usually not subject to capital gains tax under the ‘principal residence’ exemption, but this advantage would be lost if a home were to be owned by a trust, even one closely connected to the occupiers. A home owned and occupied by an individual or a couple also receives favourable treatment under social security legislation and in some cases under land tax legislation. On the other hand, equipment used in a business or profession could, if desired, be owned by a trust.
The fact that a major asset in the form of a home will continue to be owned outside any family trust structure serves to emphasise the importance of having a valid will. A by‐product of having owner‐occupied housing outside a trust and investments inside a trust is that the tax status of any interest payments will be unambiguous. This will eliminate any risk that a tax deduction for an investment loan will be disallowed because it might be tainted by the domestic nature of loan funds used for housing or consumer purposes.
Company beneficiaries
As mentioned already, except for registered family trusts, the beneficiaries of a family trust do not all have to be ‘natural persons’. It might, for example, be convenient to have a family company involved. Some such companies are pure investors, others are used to run a business, and some are involved in both roles.
If a company is introduced as a beneficiary and thus as a potential payee, then this adds to the flexibility of the overall arrangements. While its income in that capacity would naturally be subject to tax at the company rate in the usual way, this rate may be lower than that of some or all of the other potential beneficiaries. Income flowing to a company can readily be kept within that company as retained profits without penalty for a number of years and paid out only as and when desired. At that stage the relevant income would be paid out as franked dividends with attached imputation credits.
In effect, therefore, the earlier company tax becomes an advance payment and not an additional impost. Furthermore, the composition of the company's share register can be arranged to give any desired outcome. Additional shareholders can be brought in at any time, including shortly before any dividends are declared.
This gives great flexibility. In some cases, for example, it might be desirable to make ex gratia payments to current or retired employees in the form of dividends. Other options are to sell or wind up the company. Its value would naturally be influenced upwards by the size of any undistributed profits still on its books and downwards by any contingent capital gains tax liability.
