Contents
If you’re exploring options for asset protection and tax planning, setting up a trust in Australia – particularly a family or discretionary trust – can be an effective strategy. In this guide, we’ll walk you through the practical steps and legal considerations involved in establishing a trust, ensuring that you have a solid foundation for managing your assets. Whether you’re a small business owner or planning for your family’s future, understanding the process is essential for making informed decisions.
Introduction to Family Trusts
A family trust, also known as a discretionary trust, is a legal arrangement where a trustee holds and manages assets for the benefit of named beneficiaries, typically family members. This structure allows you to distribute income in a flexible manner, making it a popular choice for asset protection and efficient tax planning.
Family trusts are especially beneficial if you’re looking to:
- Protect family assets from unforeseen liabilities
- Manage how income is distributed among beneficiaries
- Plan for succession in a tax-effective way
While setting up a trust might seem complex, breaking the process down into manageable steps can make the journey smoother. This guide will provide you with a step-by-step overview of what’s involved in setting up a trust in Australia.
Steps to Set Up a Family Trust
1. Selecting the Trustee
The trustee is the person or entity responsible for managing the trust assets in accordance with the trust deed. Choosing the right trustee is crucial, as they will be legally accountable for the administration of the trust.
You have a few options when selecting a trustee:
- Individual Trustee: A family member or trusted advisor can serve as a personal trustee; however, this may expose personal assets to risk.
- Multiple Trustees: Appointing more than one trustee can spread the responsibility and offer additional checks and balances.
- Corporate Trustee: Using a company as a trustee is often recommended as it minimizes personal liability and simplifies administrative processes. To learn more about the benefits of using a corporate structure, check out our detailed discussion on company registration.
2. Drafting the Discretionary Trust Deed
The trust deed is the cornerstone of your trust arrangement. It outlines how the trust will be managed, the role of the trustee, and the rights of the beneficiaries. Key components of the deed include:
- Beneficiaries: Clearly identify who will benefit from the trust and under what conditions.
- Trustee Powers: Define the scope of the trustee’s decision-making authority regarding income and capital distributions.
- Financial Arrangements: Outline how the trustee will be remunerated, any tax obligations, and the handling of trust assets.
- Succession Plans: Establish procedures for appointing or removing trustees, ensuring continuity in trust management.
The clarity and precision in your trust deed are crucial. Consider reviewing resources like our article on what makes a contract legally binding to ensure that your deed meets all legal requirements.
3. Settling the Trust
Once the trust deed is drafted, the next step is to settle the trust. This is done by appointing a settlor – someone who is not a beneficiary – who provides a nominal sum (typically $10) to the trustee. This act of settling the trust is what legally establishes the trust.
It is important that the settlor is independent of the beneficiaries to ensure the transaction is made at arm’s length. This nominal sum is known as the “settlement sum” and serves as the seed capital from which the trust will operate.
4. Trustee Signs the Trust Deed
After the trust is settled, the trustee must formally accept the role by signing the trust deed. This act signifies their agreement to manage the trust assets in strict accordance with the deed’s provisions.
The trustee’s signature not only legitimises the arrangement but also binds them to follow the stipulated terms and exercise their powers responsibly.
5. Stamp Duty and Registration
Depending on your location within Australia, there might be stamp duty implications when the trust deed is executed. It is important to consult with your local state or territory revenue office for guidance on any applicable duties or registration requirements.
For additional information on stamp duty and registration procedures, visit the Australian Taxation Office (ATO) or your local government’s website. Proper compliance in this area is crucial to avoid future complications.
6. Apply for an ABN and TFN
For your trust to engage in financial activities, such as opening a bank account or entering into contracts, it must have its own Australian Business Number (ABN) and Tax File Number (TFN). This step is essential for managing the trust’s tax obligations and overall financial administration.
You can learn more about the requirements for business registration and tax obligations in our guide on registering a business in Australia.
7. Open a Separate Bank Account
Opening a dedicated bank account for the trust is a best practice that will help you manage the trust’s finances transparently. This account should be opened in the trust’s name and used exclusively for trust transactions.
By segregating trust finances from personal or business funds, you maintain clear financial records and ensure compliance with relevant regulations.
8. Transition to an Operational Trust
Once all the foundational elements are in place, your trust becomes operational. At this stage, the trust can accept additional contributions, borrow funds if required, and begin making investments in line with the trust deed.
As your trust starts functioning, it is critical to regularly review the trust deed and ensure ongoing compliance with all legal and regulatory requirements. Periodic professional advice can help maintain its integrity and effectiveness.
Legal Considerations
Setting up a trust is not just about paperwork; it also involves several legal considerations that must be addressed carefully:
- Tax Planning: Income distributed through the trust is typically taxed at the beneficiaries’ marginal tax rates. Thoughtful tax planning can lead to significant savings by optimising the distribution of income.
- Asset Protection: One of the primary benefits of a family trust is its ability to shield assets from potential creditors. However, the effectiveness of this protection depends on the structure and management of the trust.
- Capital Gains Tax (CGT) Discount: Under certain conditions, trusts may qualify for a 50% discount on capital gains from the sale of eligible assets. This benefit can be a key consideration when planning long-term investments.
Ensuring compliance with all these legal requirements is essential. For further insights on the broader legal requirements for starting a business and structuring your affairs, our resources can provide additional guidance.
Other Important Considerations When Setting Up a Trust
Beyond the initial establishment steps and legal formalities, there are several other factors to consider when setting up a trust in Australia:
- Ongoing Administration: Trusts require continuous compliance with record-keeping, regular meetings, and adherence to the provisions of the trust deed. Periodic reviews by legal and financial professionals are advisable.
- Flexibility Versus Rigidity: While the trust deed provides a framework for operation, it should also allow for flexibility to adapt to changing circumstances. Ensuring that the deed includes appropriate succession plans can help mitigate future disputes.
- Professional Advice: Engaging a lawyer or accountant with experience in trust structures can save you substantial time and prevent legal missteps. They can offer bespoke advice on matters such as trustee appointment and tax planning strategies. For instance, if you’re unsure about whether to manage your trust personally or through a corporate trustee, our in‐depth guide on sole trader vs company can provide valuable insights.
- Risk Management: Consider the inherent risks associated with asset management within a trust, including potential creditor actions and changes in tax laws. A robust strategy for risk management should be part of your trust planning.
- Cost Considerations: Establishing and maintaining a trust involves various costs, such as legal fees, stamp duty, and ongoing administration expenses. Budgeting for these expenses is an important practical step in your planning process.
By addressing these factors, you can better safeguard your assets and ensure that the trust operates smoothly over the long term.
Key Takeaways
- A family (discretionary) trust is an effective vehicle for asset protection and tax planning.
- Key steps include selecting the right trustee, drafting a comprehensive trust deed, and settling the trust with a nominal amount.
- Compliance with stamp duty requirements, and obtaining an ABN and TFN are crucial for legal recognition.
- Opening a dedicated bank account for the trust and maintaining proper records will help ensure transparency and smooth operations.
- Ongoing administration, periodic reviews, and professional advice are essential for managing risks and adapting to legal changes.
If you would like a consultation on setting up a trust in Australia, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
Meet some of our Business Set Up Lawyers
Get in touch now!
We'll get back to you within 1 business day.
Book in a free consultation with us to discuss your legal needs.