Family Trusts – what are they and why you should think about having one-2024

Written on the 1 November 2024 by Parkside InvestorPlus

Have you ever thought about setting up a family trust?

Well interestingly more and more Australians are starting to do so.

According to the Australian Financial Review, there are over 800,000 of them in Australia, managing $3 trillion in assets!

Let's break down what these family trusts actually are, it can be a bit confusing.

As a metaphor, you know how your friend might hold onto something valuable for you?

A family trust works kind of like that, but in a more formal and legal way (and not actually your friend!).

It's part of a bigger family of trusts called 'discretionary trusts'.

There is a famous quote from John D. Rockefeller.

He said, "own nothing, but control everything."

That's exactly what makes family trusts so effective!

It's like being the director of a movie - you're calling all the shots, but you're not actually the star.

So, how does a family trust work?

Think of it like a well-organised family business with three main players:

1.      The Trustee - they're like the CEO, running the show day-to-day and making all the important decisions

2.      The Appointor (sometimes called Principal or Guardian) - think of them as the board of directors with the power to hire and fire the CEO

3.      The Beneficiaries - these are the people who can benefit from the trust, usually family members

However, you might be thinking "what's in it for me?"

The Benefits of a Family Trust

First up, let's talk tax benefits.

Imagine being able to share your income around your family members in a way that keeps everyone's tax bill as low as possible -It's like having a financial jigsaw puzzle where you can move the pieces around to create the best picture.

Then there's asset protection.

Think of it like a financial fortress - if something goes wrong (like bankruptcy), assets in the trust are often protected. It's like having your cake in a glass display case - you can see it, but others can't touch it!

Here’s an example of how asset protection works.

Michelle is in a second marriage with David, but her two kids from her first marriage don't exactly see eye to eye with David.

Michelle has about a million dollars in a family trust, plus a house she owns with David.

She wants to make sure everyone gets their fair share without creating family drama.

Through the trust, she managed to set things up so her kids got the trust assets while David gets the house - problem solved, no awkward family gatherings required!

But hold up - before you rush off to set up your own family trust, there are some things to consider.

 It's not all sunshine and rainbows:

- You'll need to deal with ongoing paperwork and costs

- It can make your finances more complicated

- The tax rules can be trickier than solving a Rubik's cube blindfolded (which may change in the future)

Here’s the upshot - while family trusts can be amazing tools for managing wealth and planning for the future, you'll definitely want to get some professional advice before jumping in.

It's like building a house - you wouldn't do it without an architect and builder, right?

Family trusts are a powerful way to control assets, protect wealth, and keep the tax office happy, all while taking care of your family's future.

A family trust, properly crafted, can be a win-win for all in the family.

Remember though, these are just the basics, it's extremely important to chat with legal, accounting, and financial experts before setting one up.

They can help make sure you're getting the most out of your trust while avoiding any potential pitfalls.

At Parkside InvestorPlus, we help individuals and couples protect their assets for their retirement and their future generations.  For more information and an obligation free consultation, contact us on (02) 9899 4899.