Should I have a family trust?

There is no doubt that family trusts come with attractive financial benefits. However, the setting up process of a family trust can be complicating thanks to both legal and financial complexities.

When setting up a family trust, it is likely that you will need professional advice from a lawyer and an accountant. Nevertheless, it is important that you understand the basics of family trusts in order to be aware and informed of the process of setting one up. This guide should help you understand the basics of a family trust.

Benefits of a family trust

Although there are many financial benefits associated with setting up a family trust, the most common acknowledged benefit is the holding of a family’s business assets.

Where a family has members with high incomes or those who own a good range of assets (including company shares), setting up a family trust becomes even more attractive.

With that said, there are three main benefits associated with setting up a family trust:

1. Beneficiaries (not the trust) are liable to pay the income tax. This will minimise the overall payable tax through the distribution of income.
2. Assets of a trust cannot be challenged in the same manner the assets of a will can be.
3. Family assets of a family trust are protected, and the liabilities of any family member does not have to be paid from assets of the trust. Family assets are transferable to the extent of the trust list of beneficiaries including future generations of those listed as family members.

The Different Types of Family Trusts

• Hybrid Trust

Combining the best elements of a unit trust and a discretionary trust, you get what is known as a hybrid trust which comprises of both unitholders and discretionary beneficiaries.

The trustee of a hybrid trust has discretion over the distribution of income to the discretionary beneficiaries. Unitholders, on the other hand, have receiving rights to any income and capital that was not initially distributed to the discretionary beneficiaries.

The main benefits of hybrid trusts include:

• No formal requirements for audits.
• Income can be streamed so that different beneficiaries receive different incomes.
• Unitholders can claim deductions for interest paid on loans taken to purchase units.
• Capital gains tax discounts may apply.

• Unit Trust

Commonly used as a business entity, a unit trust does not allow a discretionary distribution of income (unlike a family trust would).

Under a unit trust, the distribution of income is proportionate to the number of units held by the unitholders. Units of a unit trust can be held by individuals, family trusts, and companies.

Similar to his income is distributed, the distribution of capital is also proportionate to the number of units held against all units in the trust fund.

The four main benefits associated with a unit trust are:

• Units may be bought and sold.
• Entitlement to both income and capital from the assets held by a unit trust deed are certain.
• Mechanisms overlooking the transferring of units and unit price determination can be included in the unit trust deed.
• Unitholders have a proprietary interest in properties of the trust and can lodge caveats over any land being held in the unit trust.

It is important to understand that advice should be obtained from both a professional lawyer and accountant before any decision is made as to establishing a family trust. The information provided above is general and should not be taken as legal advice.