When Should You Start a Family Trust?


Family trusts or discretionary trusts are currently some of the most preferred financial planning and wealth preservation vehicles. They are still effective as a tax minimization strategy and they also offer many families greater flexibility: unlike super funds, they will not lock away your funds for years until you retire.

Family trusts can suit multiple use cases and you don’t need to have massive assets upfront to make them worthwhile for your financial needs. When you are opting for a family trust, what should be uppermost in your mind is by how much your assets are likely to grow as well as the tax rates of the trust beneficiaries a few years down the line when you will be selling some of your trust investments and incurring the Capital Gains Tax (CGT).

One of the ways in which family trusts are effective as a tax minimization tool is that the capital gains from the trust can be distributed to family members with tax-free thresholds, that is, those who will be earning less than $18,200 annually. They could either be a spouse, kids in college or unemployed kids. Family trusts have also grown increasingly popular due to the tightening in regulations for the superannuation funds: the tax concessions and contribution limits are set to be cut further.

Trusts Work Well for Investment Portfolios

If your mortgage is out of the way and you have thousands of dollars in monthly income to invest, a family trust would be an ideal instrument. A family trust is generally not effective for a pay-as-you-go (PAYG) employee who has put most of their savings in a super. You will get few benefits by paying your salary into a trust.

Regardless of your level of income, the true family trust is unlikely to work for you if you are a PAYG employee. It’s best suited for income splitting, business ownerships as well as for investment portfolios.

A family business is likely to make the most of the family trust structure in myriad ways:-

Inheritance Investments

A family trust can be the best vehicle for investing an inheritance. The earnings in the trust can subsequently be distributed to beneficiaries with a tax-free threshold as franked dividends. The income in the family trust has to be distributed to avoid attracting taxes at penalty rates. When the trust income is distributed in this way, the overall tax burden is reduced significantly. If the kids or beneficiaries have no income, the trust earnings are distributed with franked credits. Structuring out your trust this way is generally a very complicated affair and that is why it is advisable to engage the services of a professional accountant for this purpose.

Using a Family Trust to Lower Tax

Investing in a family trust can also be a way to minimize your taxes, especially if you still have young kids. The trust money can be distributed to beneficiaries at a much lower tax rate before they get jobs and begin working.

Need advice on starting a family trust for your wealth planning and management needs? Talk to a professional accountant Melbourne practice for expert counsel that will help you weigh your options and consider what will work best for you.

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