Choosing the right trust for your family is crucial for managing your assets, ensuring financial security, and achieving your long-term objectives. Whether you’re looking to protect family wealth, manage the distribution of assets, or minimise tax, selecting the most appropriate trust structure can make a significant difference. 

In this article, we will explain the key factors to consider when choosing the right trust for your family.

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Types Of Trusts

Several different types of trusts can be used for family wealth management. Each type has its advantages depending on your needs. Below are the most common types of trusts in Australia and how they can benefit your family.

Discretionary Trusts

Discretionary trusts are one of the most flexible and widely used types of trusts in Australia. In this type of trust, the trustee has the discretion to decide how and when assets will be distributed to beneficiaries. The beneficiaries do not have a fixed entitlement to the trust’s income or capital.

When To Choose A Discretionary Trust:

• Flexible Distribution: If you require flexibility in distributing income to various family members, a discretionary trust may be the ideal option. The trustee can choose which beneficiaries receive income and capital based on their individual needs, such as if one family member has a higher income and would benefit from receiving less.
• Asset Protection: Since beneficiaries do not own the trust’s assets, discretionary trusts provide strong protection from creditors. This is particularly useful if you are concerned about potential legal claims against beneficiaries.
• Tax Efficiency: Discretionary trusts can be utilised to distribute income to beneficiaries in lower tax brackets, thereby potentially reducing the overall tax burden.

Family Trusts

A family trust is a specific type of discretionary trust designed to manage family assets. In a family trust, you can appoint family members as beneficiaries and have flexibility in how the income and assets are distributed.

When To Choose A Family Trust:

• Estate Planning: If your goal is to transfer wealth from one generation to the next while maintaining control over its distribution, a family trust is an effective vehicle. The trust can specify how and when assets will be distributed, ensuring that your wishes are honoured.
• Tax Benefits: Family trusts allow you to distribute income among family members, possibly reducing the overall tax burden. If you have family members in lower tax brackets, you can allocate income to them to take advantage of lower taxes.
• Protection from Family Disputes: Family trusts help ensure that family wealth is preserved and distributed according to your wishes, reducing the risk of disputes among heirs.

Unit Trusts

A unit trust is another type of trust where beneficiaries hold units, similar to shareholders in a company. The number of units each beneficiary holds determines their share of the trust’s income and capital. Unit trusts are often used for pooling investments.

When To Choose A Unit Trust:

• Investment Purposes: Unit trusts are commonly used for pooling investments in a business or property, making them ideal for joint ventures or family businesses. Each unit holder has a fixed share of income and capital, which simplifies management.
• Clear Ownership Structure: Unit trusts are a good choice when you need a clear division of ownership. If family members are jointly involved in a business or investment, unit trusts help define each person’s stake in the trust’s assets.

Testamentary Trusts

A will establishes a testamentary trust and comes into effect after the death of the willmaker. This type of trust is beneficial for managing assets on behalf of children, minors, or individuals who are unable to manage their finances.

When To Choose A Testamentary Trust:

• For Minor Children: If you have young children or dependents who cannot manage money themselves, a testamentary trust allows you to appoint a trustee to manage assets on their behalf.
• Protection and Tax Benefits for Children: Testamentary trusts can reduce the tax burden for minors by distributing income to them, which may be taxed at a lower rate than if the assets were held in the child’s name.
• Estate Planning: If your goal is to ensure your estate is managed for the benefit of your children or loved ones after your death, a testamentary trust can help fulfil this purpose.

Special Disability Trusts

Special Disability Trusts are designed for the care and accommodation of individuals with a disability. They have special provisions under Australian law that make them more tax-efficient and beneficial for families caring for a person with a disability.

When To Choose A Special Disability Trust:

• For Family Members with a Disability: If you have a family member with a disability, a special disability trust can help provide ongoing care and financial support.
• Tax Exemptions: Special Disability Trusts are eligible for tax exemptions, making it easier to fund the care and accommodation of the disabled beneficiary.
• Asset Protection: These trusts protect assets from being considered when determining eligibility for government benefits, ensuring the beneficiary’s access to financial assistance.

Key Considerations When Choosing The Right Trust

When selecting the right trust for your family, several key factors should be taken into consideration. These factors will help ensure that you choose a trust that aligns with your goals and provides the necessary protection and benefits.

Family Dynamics

Understanding the needs of your family is crucial when choosing the right trust. If your family members have different financial situations, a discretionary trust may be a better option, as it allows for the flexible distribution of assets. If you have minor children or dependents who require care, a testamentary trust may be a more suitable option.

Tax Implications

Each type of trust has different tax implications. For example, a family trust allows you to distribute income among family members to take advantage of lower tax rates, while a unit trust provides a fixed distribution of income. Be sure to consider the potential tax outcomes of each option and choose the one that best suits your family’s financial situation.

Asset Protection

If asset protection is a priority, a discretionary trust may be the most suitable option. Since beneficiaries do not have direct ownership of the trust assets, they are generally protected from creditors and legal claims. This is particularly important if you are concerned about family members facing financial difficulties or business risks.

Administration And Costs

Each trust type has different administrative requirements and costs. For example, discretionary trusts and family trusts may require ongoing legal and accounting services to ensure compliance with the law. Unit trusts also require careful management of income distribution, while testamentary trusts may require more complex administration.

Long-Term Goals

Your long-term estate planning goals will play a significant role in selecting the right trust. If you want to ensure that your wealth is passed down to future generations in a tax-efficient manner, a family trust or testamentary trust may be an ideal option. However, if you’re focused on asset protection or providing for a family member with a disability, a special disability trust may be the best choice.

Conclusion

Choosing the right trust for your family is a crucial decision that depends on your family’s needs, financial goals, and long-term plans. Understanding the various types of trusts, including discretionary, family, unit, and testamentary trusts, will enable you to make an informed decision about which type is best suited for your needs. 

Consider factors such as family dynamics, tax implications, asset protection, administrative costs, and long-term goals to determine which trust is the best fit. Consulting with a solicitor or financial advisor is highly recommended when setting up a trust, to ensure that your choice is legally sound and optimally structured to meet your family’s needs.

Frequently Asked Questions

What Is The Main Difference Between A Discretionary Trust And A Family Trust?

A discretionary trust is a broad type of trust in which the trustee has the discretion to decide how assets and income are distributed among the beneficiaries. A family trust is a specific type of discretionary trust where only family members can be beneficiaries, providing more focused control over family assets.

Both offer flexibility, but family trusts are typically used to manage family wealth and minimise tax within the family unit.

How Can A Testamentary Trust Benefit My Children?

A testamentary trust is established through your will and takes effect after your death, managing assets for the benefit of your children or dependents. This trust enables the careful management of assets, ensuring that the funds are used to support their care and financial needs. Additionally, it can offer tax benefits for children by distributing income in a tax-efficient manner.

Can I Change The Terms Of A Trust Once It’s Been Established?

Once a trust is established, the terms outlined in the trust deed are generally fixed and cannot be easily altered. However, some trusts, like discretionary trusts, may allow for flexibility in how assets are distributed. If changes are needed, you would typically need to amend the trust deed, which may involve legal processes depending on the type of trust.