Many people in both Australia and New Zealand choose to set up a Family Trust when buying property. Family Trusts can help protect your assets against creditors and manage unwanted claims on your estate, and currently provide a tax benefit for property buyers in Australia. Let’s take a look at what a Family Trust is and how setting one up could benefit you and your family.
What is a Family Trust?
A trust is an arrangement whereby a person (the trustee) holds assets like property in trust for the benefit of others (the beneficiaries).
A Family Trust is a legal way to provide protection for your important assets, like your family home or investment properties, against future liability claims, to put money aside for your children’s future, to manage how your assets are used after your death, or in preparation for your own retirement when you might need costly residential care. Nevertheless, it is important that you appreciate that, if the Family Trust has a deficit of assets to pay its debts, the creditor can sometimes access the personal assets of the director or trustee to make up the difference.
Once your assets are held in trust you will no longer be able to treat them as your own, and any decisions that need to be made about your assets will need to include the trustees.
How does a Family Trust work?
When setting up a Family Trust, you as the owner of the property (the grantor/settlor) will establish the trust and then particular assets can be acquired by the Family Trust, so they are not owned by you, but by the trust itself. If you transfer assets to the Family Trust, transfer duty applies in Australia to the value of those assets.
Trustees are appointed – usually a mix of family members and independent professional advisors such as lawyers, accountants or a professional trustee organisation – to manage the trust for the benefit of the beneficiaries. The trust can borrow money and invest in property that is then held in the name of the trust on behalf of the beneficiaries.
What are the benefits of a Family Trust?
There are a number of benefits to holding your investment portfolio in trust. These include:
- Profit sharing – A Family Trust allows you to distribute the income from your investment portfolio amongst family members in the most tax-effective manner each year, thereby minimising each family member’s tax liability.
- Asset protection – Property held in a Family Trust is not owned by an individual but by the trustees for the benefit of the Family Trust. That means that the investment portfolio held in trust can be protected against creditor claims against beneficiaries for their personal debts.
- Estate Planning – A trust lets you clearly outline what happens to each of the beneficiary’s share on your death, which can help avoid family disputes.
However, there could be tax implications where the family home is held in trust. A main residence is owned by an individual or a couple is generally eligible for CGT and land tax exemptions in Australia. However, if the property is owned by an entity, such as a Family Trust, these exemptions don’t necessarily apply.
How do I set up a Family Trust?
While there are a number of good reasons to set up a Family Trust, many property buyers are not familiar with the workings of a Family Trust, or the benefits and risks. It’s best you seek legal advice from an experienced lawyer or trustee company when considering whether or not to set up a Family Trust.
If you decide to go ahead, you’ll need to determine which of your assets will be held in trust, who the beneficiaries and trustees will be, and if you’ll apply any special rules around how the trust should be run.
For any mortgage or insurance advice, get in touch with one of our advisers.
While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Mortgage Express Limited for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication.
A Disclosure Statement is available on request and free of charge.