A Discretionary Family Trust often forms part of an efficient financial plan for Australian families. While they are an important element of planning for your family’s financial future, most people do not clearly understand the costs and benefits of such a trust structure.
Let’s first consider the basics.
What is a Trust?
A Trust is a relationship whereby the Trustee holds assets for the benefit of others, known as the Beneficiaries. The obligations of the Trustee are clearly outlined in the Trust Deed, which is entered into by the Trustee and the Settlor of the Trust.
Who Owns the Assets in the Trust?
The Trustee will be the legal owner of the assets within the Trust and the beneficial interest in the trust assets is held by the beneficiaries.
What is a Discretionary Family Trust?
A Discretionary Family Trust is simply a specific type of trust whereby the members do not have fixed interest in the funds. i.e. the Trustee can use his/her discretion to determine which beneficiary will receive the capital and income, although they must abide by the rules set out in the Trust Deed.
What are the Key Benefits of a Discretionary Family Trust?
There are three key benefits to a Discretionary family trust which I’ve outlined below for you:
1. Tax Planning – Income Distribution
The Trustee, each year, is able to determine which of the beneficiaries of the trust will receive the income each year. This provides substantial benefit when the beneficiaries are on different tax rates as it allows the trust to distribute income to those at lower rates of tax. You may choose to distribute some income to your non-working spouse and even if they’re earning less than you this can still be an effective strategy. You can also contribute to your children which can be beneficial if they are earning a lower income.
2. Protecting your Assets
Under the Trust structure, the beneficiaries do not legally own the assets, therefore protecting them from potential legal action taken against you. For example, if a family member were likely to go bankrupt or to get divorced, their assets could be protected from claims by creditors or their ex-spouse.
3. Multi-generational Wealth
A Testamentary Trust can allow you to continue to distribute income in a tax-efficient manner beyond your time. Because the assets remain within the trust once you pass, it can also be a sound strategy to utilise to continue to protect your assets.
Trust planning is an important consideration for Australian expats considering returning and/or retiring in Australia. An appropriate trust structure can allow you to continue to grow your assets in a tax-efficient manner while you’re working and distribute the income when you decide to retire.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
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DISCLAIMER: Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.