Do I need a discretionary family trust?
What is a family trust?
A family trust is a discretionary trust set up to hold the assets of a family or to run a family business. No two discretionary family trusts are the same, yet there are two overarching benefits in establishing and administering any family trust. These are:
- The protection of assets; and
- The efficient distribution of income.
Who and what is involved in a family trust?
- Settlor: sets up the trust and thereafter has no involvement.
- Trustee: the legal owner of the trust property who decides how to manage the assets in the interests of the beneficiaries.
- Appointer: holds the power to remove and nominate trustees when a trustee passes away or can no longer manage the trust.
- Beneficiaries: family members who benefit from the trust but have no legal ownership of the property.
- Trust deed: legal document that creates the trust establishing its objectives and identifying the trustee and beneficiaries.
What are its advantages?
- Protection of assets: individuals can hold onto their assets without being the legal owner of them thus protecting them from pursuit by a creditor.
- Tax advantages: beneficiaries pay tax on their individual share of the trust’s net income.
What are its disadvantages?
- Cost: the set up and administration of a trust can be quite costly.
- Trustee’s liability: as the legal owner trustees are personally liable for trust debts incurred. This liability can be reduced by appointing a company as trustee rather than an individual.
- Investment: investors prefer company structures over trusts thus creating a barrier to growth for a business run through a trust.
You should always seek legal advice before proceeding with a discretionary family trust.