Family trusts in Australia: the pros and cons

A trust, as defined by the ATO, is "an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries."  

In simple terms, it's an investment vehicle treated as its own entity for tax purposes. The trust, led by a trustee, owns and manages the investments and assets under its name. It then makes distributions (payouts of profits from investments) to its beneficiaries.

Discretionary trusts are commonly called family trusts because they are often used by couples and multigenerational families to consolidate money and investments for long-term growth.

They aren't just for the super-rich either. There were just over 1.02 million trusts registered in Australia in the 2022-23 financial year, according to the latest ATO data. Together, they generated almost $489.5 billion in total business income - an average of about $478,800 per trust. Earnings are likely to be even higher today. 

Like all things investing, though, trusts come with their own set of risks and limitations. Let's explore the pros and cons to help you work out whether a family trust is right for you. 

Pros of family trusts

• Tax-friendly: Trusts don't pay tax, provided all distributions are allocated to one or more beneficiaries. Each beneficiary then pays tax at their own income tax rate. You can reduce overall tax, for example, by making the lower earning spouse the sole beneficiary of funds or by paying dividends into a family company, which pays the company tax rate rather than higher personal rates. Additionally, a trust can be eligible for a Capital Gains Tax (CGT) discount.

• Accessibility: Unlike super, which you can't touch until you reach a certain age, earnings held within a trust can be accessed any time. You could, for instance, use funds to supplement your employment income or as a lump sum towards starting a business or helping a younger beneficiary with their first home deposit. 

• Flexibility: Trusts don't have the same limitations on asset ownership that super does, giving you greater flexibility in how funds are invested. Essentially, anything you can do outside a trust you can do within one. Additionally, you can change beneficiaries anytime, prioritising people with the greatest financial need or lowest tax rate at that time.

• Trust exemptions: Distinct types of trusts offer specific benefits or exemptions to standard rules. A disability trust, for example, can provide someone living with disability additional income without affecting their Centrelink payments or NDIS access, while a testamentary trust allows children to be taxed on earnings at the considerably lower adult tax rate. 

• Risk protection: As a separate entity, some trusts may provide asset protection to safeguard against future bankruptcy, legal action or relationship breakdowns. 

Cons of family trusts

• Viability: You typically need at least $300,000 to make a trust financially viable as an investment - similar to a self managed super fund (SMSF). As such, a trust may be out of reach of younger and first-time investors. This may mean investing in your own name in shares or high-interest savings accounts/term deposits, to grow funds until there is enough to make a trust viable. Bear in mind, this amount is likely to increase over time with inflation. 

• Costs: Setting up a trust can cost several thousand dollars in registration and advice fees. On top of that, there are ongoing expenses for lodging tax returns, renewing registrations, staying legally compliant, and paying for ongoing tax, legal and financial advice.

• Bureaucracy: Having a trust isn't as simple as investing personally. It must be registered with its own Tax File Number (TFN) and Australian Business Number (ABN), have a trust deed, and beneficiaries of each distribution must be nominated to avoid the trust being taxed at the highest tax rate.  

• Analysis paralysis: While options are a good thing, they can be a negative when you either choose the wrong one or become so overwhelmed that indecisiveness stops you doing anything. This can be the trap of trusts. You need to weigh up trust types based on your goals and circumstances, such as family, unit, disability or testamentary trusts.  

• Appointing trustees: There are risks around who gets appointed trustees. For instance, an individual trustee is usually cheaper to establish than a company trustee, but can trigger CGT should you need to transfer to a different trustee later on (for example, if the trustee dies). Beneficiaries have no control over investments and distribution of funds unless they are also a trustee. Additionally, the trust's appointer has the power to terminate other trustees, an authority that could be open to abuse. 

Key takeaways 

Determining whether a trust is right for you - and how to make the most of it - means carefully weighing up the pros and cons.

Consider getting professional advice from your accountant, estate planner and financial adviser to back your decision. They can help you unravel the complexities and understand how they apply to your situation.

Finally, remember the old saying about too many cooks. A trust lets you pool funds with multiple family members, but the more trustees and beneficiaries involved, the more complicated things become - and that can undo all your hard work.