Family Trust Deed

• Family Discretionary Trust

• $385 includes GST

• Designed to maximise asset protection.

• Start for free
• Checklist

There is a misunderstanding in society that ‘trusts‘ are just for rich people. They are often associated with blue blood families and powerful moguls. However, trusts are effective for anyone running a business, building wealth and protecting assets. There are over 800,000 Australian family trusts.

Family Trusts reduce the overall tax rate among family members, protect assets from creditors and provide succession planning. They are useful in wealth creation and retention.

What is a Family Discretionary Trust?

A ‘discretionary trust’ and ‘family trust’ are the same thing. A family trust has “no fixed meaning and is used to describe particular features of certain express trusts”. See Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226

See full free sample of the Family Trust deed

As with all Legal Consolidated documents you can see a full copy and covering letter of the Family Discretionary Trust deed document. Just press the “Sample Document” button above.

Benefits of a Family Trust:

1. Family Trust protects assets and saves tax

A trustee holds assets in its own name. But it holds the assets for the benefit of someone else. That someone else is called a beneficiary. A Family Trust is a popular vehicle set up by accountants and financial planners. It is great for both wealth creation and asset protection:

1. each year pay trust income to family members on low marginal tax rates

2. protect assets from creditors (asset protection)

3. succession planning – no CGT or stamp duty when you die

4. the trust can loan money to family members to buy investments – delivering tax breaks (or you can lend money to your family trust)

5. invest in insurance bonds to access lower aged care fees

6. hold shares in a company

7. hold units in a unit trust.

Legal Consolidated is a specialist trust law firm. Our Family Trust is cutting edge allowing your accountant and adviser to seek all tax savings.

A family trust and discretionary trust are the same things. They are just different words for the same document.

2. Pay less tax with a Family Trust – hunt down family members with low marginal tax rates

A trust must have a trustee and a beneficiary. If the trustee and beneficiary ever become one and the same person then the trust finishes. (The third requirement for a trust to exist is that it must have assets or something of value.)

A Family Trust has both a trustee and many beneficiaries. It also has Appointor. An Appointor is god. It bosses the trustee around. The Appointor is usually mum and dad and the Trustee is often their company. The Appointor tells the Trustee who gets the trust income each year.

For example:

• Mum earns a lot of money through her work. She pays a high tax rate.
• In contrast, stay at home Dad earns no income.
• Also, the children at university earn only a little income from part-time jobs.

The Discretionary Trust distributes the trust income to these beneficiaries on low incomes. In this case Dad and the children.

The tax rate is as low as zero. Next year one of the children finishes at university and gets a job. They now pay a high marginal tax rate. Not a problem. The Discretionary Trust does not now distribute to them. Every year you hunt down family members on low marginal tax rates.

Family Trust beneficiaries include mum and dad, their company, adult children, children’s spouses, grandchildren and their spouses. It includes your parents and distant relatives.

400,000 beneficiaries in an Australian family trust

It comes as a bit of a shock to people, but most Family Trusts have about 400,000 beneficiaries.

• • It is not just your family and distant family members living all over the world that you do not know and will never meet.
  • It is not just all Australian charities, schools and universities.

But if you own shares in say Rio Tinto, then all the shareholders of Rio Tinto are beneficiaries of your Family Trust. If you could, you would make every person in the world a beneficiary. But the ATO will not allow that. Do not worry. Beneficiaries have few rights. The more beneficiaries the better.

The class of beneficiaries in a Family Trust are often “open”:

Also, there are ‘open classes’ of beneficiaries. For example, when you get married and have children then your spouse and children are automatically added to the class of beneficiaries. Also if you have an ‘interest’ in a company, that company becomes a beneficiary. This is called a ‘bucket company‘.

When I built my Family Trust Deed I was not married. I had no children and I had no company. Later I built a company on the law firm’s website. As soon as I did, the company became a beneficiary of my Family Trust. This is automatic. You do not need to do anything. The class of beneficiaries automatically increases without you doing anything.

Later, I got married and my wife automatically became a beneficiary. We then had a son. And our son automatically becomes a beneficiary of my Family Trust. When my son gets a wife and his own children they will automatically become beneficiaries of my family trust.

There is nothing I needed to do for these ‘open classes’ of beneficiaries to be increased. There is also nothing I can do to stop these additional people from becoming beneficiaries! But, again, do not worry. These beneficiaries have few rights. The person in power is the Appointor. The Appointor bosses the Trustee. The Appointor tells the Trustee what to do.

Banker wants a list of the beneficiaries of the Family Trust

Q: We are building our client’s Family Trust deed on your website. I specify the Default Beneficiaries. These are ‘the children of Colin Jones and Muriel Jones’. This shows on the Family Trust deed. But the client’s banker is asking for a list of all the Family Trust’s beneficiaries. 

A: I suggest that you read the above information again. We are an Australian wide tax law firm. We know little about banking. And it may be the case that the banker knows little about Family Trusts, Unit Trusts, Bare Trusts, Partnership of Family Trusts and companies. And that is fine. 

Bankers ask for the Beneficiaries of Unit Trusts, Bare Trusts and Self-Managed Superannuation Funds. And the banker asks for the shareholders of the company. These are usually finite and ascertainable.

The list of beneficiaries of a Family Trust is in the 1,000s. So a banker does not ask for a list of beneficiaries in a Family Trust. Instead, the banker, for a Family Trust, wants:

• Appointors – this is the person who controls the Trustee of the Family Trust
• Back-up Appointors – these are the lucky people who control the Family Trust after the Appointor dies
• Trustee or Corporate Trustee of the Family Trust
• Default Beneficiaries (also called Takers in Default, Specified Beneficiaries and Named Beneficiaries)

Show the banker this information. The banker defers to his or her superior. Their superior helps the banker read the Family Trust deed to get the information required.

Banker wants to know about classes

Q: The banker is asking if any of the beneficiaries are a member of a ‘class’. Do the terms of the trust identify the beneficiaries as members of a beneficiary class (eg unit holders, family members of a named person, charitable organisation or cause)?

A: Again, as stated above, these are not questions for a Family Trust. Almost all beneficiaries in a Family Trust, of which there are 1,000s, are referenced by the ‘class’ they are in.

For example, ‘the children of the Appointor’ is a class. So are ‘all religious groups and educational organisations’. Most Family Trusts in Australia are structured that way. So to answer the two questions is always yes. This is for all Australian Family Trusts. But as I said, it is a silly question to ask. This is because the answer is always yes.

Banker wants a Specified Beneficiary removed from a Discretionary Trust

There are Capital Gains Tax and stamp duty issues when changing a Default Beneficiary. It is an unusual request for a banker trying to lend your Family Trust money. And it is a very uncommon thing to do. (On another topic, sometimes you have to do things to reduce a foreigner beneficiary for state land tax and stamp duty surcharges. But that is another matter.)

As the name suggests, a discretionary trust is discretionary. The trustee is not obliged to distribute assets to any particular beneficiary. This includes default or named beneficiaries.

Sure, a default beneficiary does have a contingent interest in the Family Trust property. But the interest is contingent upon the trustee not otherwise exercising its discretion. This almost never happens. See Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) HCA 4; 192 CLR 226.

The ATO is of the view that neither an ordinary beneficiary nor a default beneficiary has an ‘interest’ in a discretionary trust of the type referred to in S.104-70. See TD 2003/28.

You cannot change the Specified Beneficiary. Politely ask the banker to talk with a lawyer at their head office. 

What rights does a Beneficiary in a Family Trust have?

Beneficiaries have no right or expectation to any money from the trust. But a trouble-making beneficiary may ask to see the accounts and records of the trust. The court has the power to grant access, at its discretion. But it rarely does so. See Smorgon v ES Group Operations Pty Ltd & Ors [2021] VSC 608.

Consider Wang v Cai [2021] NSWSC 1162. A beneficiary has concerns as to the maladministration of the trust. The court rejects the request for information about the trust.

Do beneficiaries in a Family Trust have any rights?

The rights of a beneficiary are set out in a trust deed. For example, beneficiaries in a Unit Trust (called Unit Holders) and Bare Trusts have control.

However, in a Family Trust the potential beneficiary has only the right to be considered. This is when the Family Trust is making distributions of income and capital. This is confirmed in Gartside v Inland Revenue Commissioners [1968] AC 553.

In Gartside, the court held that beneficiaries of a family trust:

• so not have a proprietary legal or equitable interest in the trust assets. They are merely members of a class of potential beneficiaries. This is under the trustee’s power of appointment over trust income and capital.
• but do have the right to insist on the proper administration of the trust.

This is confirmed in many cases. Karger v Paul [1984] VR 161 states:

“It is an established general principle that unless trustees choose to give reasons for the exercise of discretion, their exercise of the discretion cannot be examined or reviewed by a court so long as they act in good faith and without an ulterior purpose …” [and that the trustees] “act upon real and genuine consideration”.

Does a beneficiary in a family trust hold an equitable interest in the assets?

A beneficiary does not hold an equitable interest in the trust assets.

But each beneficiary of a discretionary trust has the right to:

• compel the trustee to consider whether or not to make a distribution to him or her
• proper administration of the Trust. (Gartside v Inland Revenue Commissioners [1968] AC 553, 617)
• be considered as a potential recipient of benefit by the trustees
• a right to have their interest protected by a court of equity

To this minor extent, each beneficiary has these limited (useless) rights under the Family Trust.

These minor rights are not to be confused with an equitable interest in the trust property. The beneficiary has no rights to any specific assets in the Family Trust.

Gartside v Inland Revenue Commissioners

In Gartside, it is held that the limited rights of a beneficiary under a discretionary trust are not sufficient to create a taxable “interest” in the property or income of the trust fund. The case is about if deceased estate duty is payable. This is the death of a beneficiary of a discretionary trust on advances made by the trustees of that trust to other objects of that trust.

It was argued by the cheeky Inland Revenue Commissioner that the duty of the trustees to exercise their discretion gave each object (beneficiary) an “interest” in the trust fund. And that those interests are interests in possession and that the death of one object of the trust (beneficiary) resulted in the cessation of that interest. The Court correctly states:

‘No doubt in a certain sense a beneficiary under a discretionary trust has an ” interest”: the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. ….

But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund’s income: it may be a right, with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed.’

In the view of the Court, to give any other construction gives rise to a result that is capricious. Every time an object (beneficiary) of a discretionary trust dies, duty is payable on the whole of the trust estate. This is even if none of those objects (beneficiaries) received anything. On that silly interpretation, the trustees could have chosen to
apply the whole of the income of the trust estate to any one of the objects. Such a ‘monstrous’ (page 605) result
could not have been intended:

‘If giving an extended meaning to a word in an Act, and particularly in a taxing Act, leads to a wholly unreasonable result that is a very strong indication that the word was not intended to have that extended meaning.’ (Gartside at 605)

I could not see an option to add my parents as beneficiaries. Will the Family Trust allow for distributions to them?

There are about 400,000 beneficiaries in a modern Australian family trust. The ‘classes’ of beneficiaries for Legal Consolidated Family Trusts include ‘parents’, ‘children’ and ‘great, great, great-grandchildren.

The ‘classes’ are numerous and drafted as wide as possible.

At what point can a new spouse be added as a beneficiary of a family trust?

You do not ‘add’ a person as a beneficiary. They are automatically added. So when you are in the church and you say “I do” and you sign the marriage certificate, at that very point your spouse is a beneficiary of your Family Trust. It happened automatically, whether you wanted it to happen or not. 

By the time you walk out of the church, your new spouse is already a beneficiary of your family trust. This is because the class is open.

Similarly when your child is born, at that very point, your child automatically becomes a beneficiary under your Family Trust.

So just before the end of the financial year, when you do your annual Family Trust distribution you can write in your new spouse and new child and make a distribution to them.

Family Trust elections – the kiss of death

Q: Does a Legal Consolidated Family Trust allow for a ‘family trust election’? The ATO suggests that an FTE is good.

A: Yes, a Legal Consolidated can have a ‘family trust election’. But an FTE is bad. This is because it reduces the class of beneficiaries down from 100,000s to just a handful of your family members. And you lose the bucket company. If your Family Trust needs to be destroyed by an FTE then do not put any more wealth into it. It is dead. Instead, lick your wounds and start a new Family Trust.

As to the disadvantages of an FTE and when you have to make that election speak to your accountant.

And finally, beware of regulators and the government. They are not your friends. Never deal with the ATO directly. Always instruct your accountant to communicate with the ATO.

How does ‘income splitting’ work in a Family Trust?

An Australian discretionary trust minimises a family’s total tax bill.

The family trust itself doesn’t pay tax. Instead, it distributes the income to beneficiaries: humans and sometimes a company. (‘Bucket’ companies are rarely used because of Division 7A.).  These beneficiaries pay tax on the trust distribution (income) at their personal tax rate.

Australians pay tax at marginal rates. The greater your income the higher rate of tax you pay. Obviously, you distribute income to the lower-income earners. They pay no tax or a lower percentage of tax. Thus, you even out the overall taxable incomes.

1. The high-income individual directs business and investment earnings into the family trust. (These cannot be wage and salary earnings.)
2. The trust then has to allocate all that income.
3. The family discretionary trust makes payments to beneficiaries on the lowest incomes. Those beneficiaries pay the least tax.

Every year the Appointor directs the Trustee to pay out all the trust income to the beneficiaries. Your choice of beneficiaries can change each financial year. For example, last year you distributed to your retired parents. This year you distribute to your child who just turned 18 years of age and is not working.

You make multiple uses of the tax-free threshold and lower tax rates enjoyed by family members on low incomes. During the 80-year life (unlimited in SA) of the Family Trust, each year you pick and choose beneficiaries on low tax rates.

Therefore, the effectiveness of a discretionary trust depends on the availability of beneficiaries.

When do we pay tax in a Family Trust?

Q: I want to create a discretionary trust for myself, my fiancé and our future children:

• Do we pay tax when the income is earned in the Family Trust?
• Or do we only pay income tax when we take the income out of the Family Trust?

For example, if I put $1,000,000 into the trust but we only pay ourselves $150K each how does that work?

A: You only pay tax on the income that is earned in the Family Trust. Someone, either a beneficiary or the Family Trust trustee must pay income tax (or capital gains tax) on all income derived by the Family Trust. This is for each financial year. It makes no difference if you:

• fail to distribute the income – in that sad case, the trustee of the Family Trust just pays the tax
• distribute the income – the lucky beneficiary pays the tax on the income. This is the case, even if the beneficiary never actually sees the money.

Consider these 4 examples:

1. Lend money to a Family Trust

Mum, Dad or a bank lends $1m to the Family Trust. The loan is interest-free. The Family Trust pays no tax on that $1m. There is no income tax payable on loans. When the loan is paid back the Lender pays no tax on the repayments.

• • As to your specific example, you put $1m into your Family Trust. Mum and Dad can take back that lent money tax-free. So, yes, you could get the Family Trust to return $150k of the loan principal each year. And, of course, there is no income tax payable by anyone on the repayment of the loan. You use the expression in your question ‘pay ourselves’. But you are not paying yourselves anything. You are just getting the borrower to return capital from a loan.
  • If you are charging interest on the loan. Then the lender (Mud and Dad) pays tax on the interest earned on the money lent. And the Family Trust may get a tax deduction on the interest it pays to the lender. But there is no tax on the principal that is repaid by the borrower to the lender. For example:
    • You lend your family trust (or someone else such as a child or your company) $1m at 10% interest payable in one year. One year later the family trust pays you $1.1m. The $1m is tax-free. This is because it is just a return of money lent. But Mum and Dad must declare the $100k in interest as income. This is on their personal income tax returns. The Family Trust (this is the same for any lender, such as a child or your company when you lend them money) may be able to get a tax deduction on the interest they paid on the loan.

2. Gift money to a Family Trust

You gift $250k to the Family Trust. The Family Trust pays no tax on the gift. There is no income tax payable on gifts. (But Centrelink may be interested if you get Centrelink benefits).

3. Earn money in a Family Trust – but not distributed

Your Family Trust earns $350k. But you do not need the money. Therefore, you do not distribute the income to any beneficiary. Do you still pay tax on the $350k? Yes, you pay tax on all income earned by the Family Trust. If you do not distribute that income to a beneficiary, then the Trustee of the Family Trust pays the tax on the income. And this is at the highest marginal tax rate. So your Family Trust is silly if it does not distribute all income to beneficiaries each financial year. This is how to distribute income each financial year.

4. Earn money in a Family Trust – but distributed

My Family Trust earns $18,200. My wife and I are already on the highest marginal tax rate. So we distribute that money to our 18-year-old daughter who is in high school. Who pays the tax on that income?

• • The Trustee does not pay tax on this $18,200. This is because you distributed the income to a beneficiary.
  • Mum and Dad (while they did all the work of earning the money and while they are the powerhouse at running the Family Trust) do not pay any tax on this $18,200. This is because the income is distributed to another beneficiary. This is your daughter.
  • Your daughter must put this $18,200 on her personal tax return. This is when she completes her yearly tax return. However, your daughter earns no other income that financial year. Under the marginal tax system in Australia, the first $18,200 is tax-free. Your daughter is over 18 years of age. That is the only requirement. The fact that she is not working or she is at school is not relevant. The $18,200 is tax-free. Well done. Just make sure you completed the Annual Distribution Minutes correctly.

Children under 18 are not of much use in a Family Trust

Your income from a Family Trust each year is called a ‘distribution’. This is ‘unearned’ income. You can only distribute up to $416 each financial year to a minor. (The tax rate for a minor then climbs to 66%!) This is because of the draconian effect of Division 6AA ITTA 1936. However, section 102AG ITAA 1936 gives an exemption to minors (someone under 18 years of age):

1. Minors in 3-Generation Testamentary Trust Wills get an adult tax rate threshold – they are treated as though they are adults (but you have to die to get the Will to operate – which is the absolute sacrifice to tax minimisation!)
2. Disabled children (e.g. on a disability support pension) also get an adult tax rate threshold.

There are, however, often other family members aged over 18 who are on low marginal tax rates. These beneficiaries receive trust income. They include adult children who are studying or a low-income-earning spouse.

Also, think of the future.  If your child is 12 now, then you have a while to wait. But in the meantime, your spouse might stop working.

3. Reduce land tax with a Family Trust with a Corporate trustee

Own more than one property in the same State? The more property in one person’s name the higher the marginal land tax rate. Instead, hold each property in a separate Family Trust with a different Trustee. You, therefore, get the tax-free threshold for each property. Secondly, you pay a lower marginal tax rate for each property. Consider having a company or another person as the trustee.

4. Challenges to your Will vs Family Trusts

Only a spouse or defacto can challenge your Family Trust. Children cannot challenge a Family Trust. Family Trusts quarantine assets from challenges to Wills.

A Will (even a 3-Generation Testamentary Trust Will) and anything that forms part of an estate can be contested. But, a Divorce Protection Trust in the Will may stop this.

In contrast, a family trust is a separate entity. The assets within the trust are protected from family members and children that could otherwise challenge a Will. However, because of ‘notional’ estates in NSW, it is harder, but not impossible to protect the family trust assets in NSW after the death of the Appointor. In that situation put a Considered Person Clause in your Will.

5. Superannuation vs Family Trust

Unlike a superannuation fund, holding assets within a trust does not necessarily lock them away for years. If you are young and need flexibility then a family trust is often used to hold assets outside of superannuation. Often your accountant and adviser interchange the family trust and super as part of the overall wealth creation strategy. Depending on your age, they maximise the super contribution levels first and then use surplus funds for the trust. If a client is not maximising super contributions, often they shift assets from the trust into super.

6. Asset Protection – unique protection only provided by Legal Consolidated’s trust deeds

Legal Consolidated Family Trusts have unique proprietor asset protection built into the trust deed.

Family Trusts protect a business owner’s personal assets from their business assets. This is if their business goes down the gurgler. The common strategy is to build a company as a corporate trustee of a family trust. This is how to do it: https://www.legalconsolidated.com.au/company-as-trustee-of-family-trust/

Legal Consolidated’s Discretionary Trust deed deals with Richstar (No 6) (2006) 153 FCR 509 by carefully applying these cases:

• Tibben & Tibben [2013] FamCAFC 145 – The only “entitlement” of the beneficiaries under the Deed of Settlement is a right to consideration and due administration of the trust: Gartside v Inland Revenue Commissioners [1968] AC 553.
• DCT v Ekelmans [2013] VSC 346 – The applicant relied on the decision in Richstar to contend that the cumulative effect of the role and entitlement of Leopold Ekelmans under the trust instruments amounted to a contingent interest in all of the assets of the trust, making those assets amenable to a freezing order as if the assets of Leopold Ekelmans. The Court found that the applicant could not in this matter rely on Richstar.
• Hja Holdings Pty Ltd and Ors & ACT Revenue Office (Administrative Review) [2011] ACAT 91 – Notwithstanding those beneficiaries under a discretionary trust have some rights, such as the right to have the trust duly and properly administered, generally, a beneficiary of a discretionary trust, who is at arm’s length from the trustee, only has an expectancy or a mere possibility of distribution. This is not an equitable interest that constitutes “property” as defined.
• Donovan v Sheahan as Trustee of the Bankrupt Estate of Donovan [2013] FCA 437 – A beneficiary of a non-exhaustive discretionary trust has no assignable right to demand payment of the trust fund to them (and nor have all of the beneficiaries acting collectively) and that the essential right of the individual beneficiary of a non-exhaustive discretionary trust is to compel the due administration of the trust.
• Simmons and Anor & Simmons [2008] FamCA 1088 – The court and parties referred to Richstar on a number of occasions and confirmed that a beneficiary has nothing more than an expectancy.
• Public Trustee v Smith [2008] NSWSC 397 – Richstar did not establish that because a beneficiary of a discretionary trust controls the appointment or removal of the trustee, or controls the exercise of the trustee’s power and can appoint trust property to themself, the holder of such a power is the beneficial owner of the trust property irrespective of the terms of the trust deed.
• Swishette Pty Ltd v Australian Competition and Consumer Commission [2017] FCAFC 45 (“Swishette”) – As an object of a discretionary trust, a beneficiary has no legal or beneficial interest but only the right to due consideration and due administration of the trust.  The fact that someone may control a trust both as appointor and as director of the trustee company, does not give them an interest in the trust property amounting to ownership (see DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510).
• Pleash, in the matter of Equititrust Limited (In Liquidation) (Receivers and Managers Appointed) (No 3) [2017] FCA 1074 – The reasoning in decisions such as the case of Swishette (mentioned immediately above) reject the arguments put forward in Richstar and should be followed as the correct approach, in preference to the reasoning in Richstar.
• Colefax v National Australia Bank [2018] QCA 244 – The interests of an object under a discretionary trust do not vest in a trustee in bankruptcy (see Dwyer v Ross (1992) 34 FCR 463 and Fordyce v Ryan [2017] 2 Qd R 240 and confirmed in Edwards v Crawford [2020] TASSC 20).

Does my Settlor and Family Trust Trustee need to sign together?

A Legal Consolidated Family Trust deed and Family Trust updates are drafted so that the Settlor and Trustee can sign the Family Trust deed on different days. And they can have different witnesses.

For example:

Robert is the accountant. He is the Settlor of his client’s family trust. (Which is common.) Robert builds the Legal Consolidated Family Trust deed on the law firm’s website. He prints it off. Robert immediately signs the Family Trust deed as settlor. This is in North Sydney. This is in front of one of his secretaries. Robert dates the family trust on the day he signed as settlor. The process from beginning to end took about 20 minutes.

The family trust has two human trustees. One of the trustees is currently skiing in Mount Beauty in Victoria. Robert couriers the family trust deed to Mount Beauty. It arrives a few days later. The first trustee signs the Family Trust deed. A stranger witnesses his signature. 

The second trustee lives in Brisbane. But is currently on holiday on the Greek island of Milos. The first trustee couriers the Family Trustee deed to Milos. The second trustee signs the Family Trust deed. His signature is witnessed by another stranger.

The second trustee scans and emails the, now fully signed Family Trust deed to his accountant, Robert and the first trustee. He then keeps the Family Trust deed in his luggage and drops it off to Robert when he back home in Sydney. This is in a few weeks’ time.

Where is the name check for a Family Trust? Is there a register of Family Trust names?

Q: I built a corporate trustee company. And now I am building the Family Trust. I did a company name search on your website. Where is the Family Trust name search? I want to see if someone is using the same Family Trust name.

A: There is no register of Family Trust names. Your Family Trust’s name can be identical to someone else. It is only the ABN that is different. For example, do a search at ABN Lookup of “Smith Family Trust”. There are a lot. All have the same Family Trust name. (Also many Family Trusts do not need an ABN. And therefore do not appear in these government records.)

Family Trust vs other types of trusts

a. Company vs Family Trust – CGT concessions trapped in a company

Discretionary Trusts often hold appreciating assets such as shares or land. CGT relief flows through to the beneficiary. Capital gains are taxed at concessional rates. In contrast, when you dispose of an asset out of your company the CGT concessions are lost. You can’t get them out of a company.

Also, when a trust makes a capital gain, 50% of the amount is tax-free. This is provided that the asset is held in the trust for over 12 months.

b. Last Will & Testament vs Discretionary Trust – you can’t challenge a Discretionary Trust

Your children’s divorce, spendthrift children and conniving children-in-law can’t touch the assets in your Family Trust. The only person that can attack your Family Trust is your spouse. In contrast, many people including parents, children and grandchildren can challenge your Will. Except for NSW, the Discretionary Trust quarantines assets from your Will.

A Will and your estate are contestable – but see a Divorce Protection Trust in your Will. However, a Family Trust is a separate entity to you. Trust assets are harder to attack.

c. Superannuation vs Discretionary Trust – super traps your money

Superannuation is a wonderful tax haven. The tax rate, going in, is usually only 15%. But the money is locked away until you retire. Unlike a superannuation fund, your assets in a Family Discretionary Trust are not locked away. Also, potentially, you can get the tax rate down below 15%, even to zero. This is if you have beneficiaries on low incomes.

Often your accountant and financial planner maximise your super contribution levels first. They then put surplus funds into the Family Trust.

Company or a Human? Which one is best as the trustee of my Family Trust?

Your family trust must have a trustee. The trustee is a human or a company. Which one is best?

This question is about asset protection. If the Family Trust goes insolvent then the trustee of the Family Trust goes down with the Family Trust.

But if your Family Trust:

• only holds passive safe assets (like shares) then there is not much value in having a company as the trustee of your Family Trust.
• is going to operate a business then build a company and make it the trustee of your family trust. This is called a ‘Corporate Trustee‘. It is worth the extra cost. Research the issue here.

‘Discretionary’ trust vs ‘Family’ trust

A discretionary trust is often called a Family Trust or Family Discretionary Trust. It means the same thing. It gives the Trustee (acting under the Appointor) huge discretion on who gets the trust income each year.

Each financial year the Appointor tells the Trustee which beneficiaries are to get that trust income.

Until the Trustee exercises its discretion, the beneficiaries have no interest in the trust property. This means that your children have little power to try to get money out of the trust.

Every year the Trustee decides who gets the trust income. The Trustee hunts down beneficiaries on low tax rates and uses those low tax rates to pay less tax. The beneficiaries rarely see any money out of the trust. Each year they merely forgive the debt by signing a Debt Forgiveness Agreement.

Trustee vs Appointor – which one is god?

There is only one power in a Family Discretionary Trust. That person is the Appointor.

• The Appointor hires and fires the Trustee.
  • The Appointor does not ‘own’ the Family Trust assets.
  • But the Appointor ‘controls’ the Family Trust assets. And that is good for both tax and asset protection.
• The Trustee is merely the Appointor’s puppet. The Appointor can replace the Trustee.
• The Beneficiaries get nothing out of the trust. This is unless the Appointor tells the Trustee something different.
• The Default Beneficiaries also get nothing out of the trust. They only get something if the Appointor forgets to tell the Trustee to distribute income and capital. (This almost never happens.)
• The Settlor primes the trust with a few dollars:
  • The amount is usually $10. This is just to get the trust started.
  • The Settlor is heard of no more. The Settlor can never be a beneficiary. So make sure the Settlor is a stranger and not related to you.
• The Backup Appointors only get the job of being the Appointors after the currently Appointors all die:
  • For example, mum and dad are the Appointors. The Backup Appointors are the children.
  • Dad is killed in a car accident. Mum is now the sole Appointor.
  • Mum now dies. The Backup Appointors (the children) automatically become the Appointors.
  • The Appointor can update and change the Backup Appointor.

Trustee vs Appointor – who holds the power in a Family Trust

Who is in charge? Is it the Trustee that ‘owns’ the assets? No, the Appointor is god. The Appointor bosses the Trustee. The Trustee looks like it is in control, as it has the assets in its name. However, the Trustee takes it marching orders from the Appointor. The Appointor can sack the Trustee on a whim, for no reason at all. For example, the Trustee has nothing to do with this Deed of Variation. The variation relates to the Appointors only. The Trustee is not even party to the Deed of Variation.

Can the Family Trust Appointor be BOTH mum and dad?

Yes, commonly mum and dad are each an Appointor together. You can have as many Appointors as you wish.

You can also have as many Backup Appointors as you wish. The Backup Appointors are generally your children: ‘the union of Dad Full Name and Mum Full Name’.

Can the Family Trust appointor be a company?

It is becoming more common to set up a company as a dedicated Appointor of a family trust. So, for example, mum and dad are Appointors, in the first instance. The company is the Backup Appointor. You and your spouse own the shares in the company. (Obviously, the shareholders have ultimate control of the company, not the directors.) When you and your spouse die (i.e. once the Appointors die) your children inherit the shares in the Appointor company. Your children, get everything equally in your Will and therefore control the family trust via the control of the shares in the Appointor company. (This is an exemption to the rule that a Will should not control the family trust.) Commonly you would also have a Shareholders Agreement to lock in the rules. If the beneficiaries getting the shares are minors then the executor(s) in mum and dad’s Wills control the shares (and therefore the assets in the Family Trust). They can only act in the best interests of the minor children. (Whether you have a 3-Generation Trust Will the position is the same.)

Succession Planning in a Family Trust for a blended family

Q: We are a stepfamily. We have one “ours” child (Ralf), and one “hers” child (Mary) from a previous de facto relationship. We are pregnant with a second “ours” baby. We have also taken on the responsibility of my dead brother in laws’ 12-year-old son (Colin). We treat Colin as our child.

I (Peter) and my current wife (Eva) are going to be the joint Appointors.

How do we answer the “Default Beneficiary” and “Backup Appointor” questions for a blended family?

A: The “Default Beneficiary” is not that important.

But the “Backup Appointor” is vital. You and your current wife are the current Appointors. The Backup Appointors get control of the Family Trust after both of you die.

If you want all of those family members to get control of the Family Trust assets after you both die then name them all. And if the ‘classes’ are open – such as future children then name the class ‘…. and the children of the union of Peter Bernard Smith and Eva Ruby Smith’. For example in a Default Beneficiary and Backup Appointors:

Ralf Full Name, Mary Full Name, Colin Full Name and the children of the union of Peter Smith and Eva Smith

Does my Family Trust finish after 80 years?

All Australian Family Trust deeds state a date that it must end, this is 80 years. Stupidly it may be less.

After 80 years the beneficial interests in the property of the Family Discretionary Trust are fixed. This avoids breaching the ‘rule against perpetuities‘.

However:

• Legal Consolidated Family Trust Deeds do not have a vesting date for South Australia. Legal Consolidated South Australian Family Trusts can go on forever.
• Also, if the 80 year limitation period is ever rescinded, in a particular State, then the Legal Consolidated Family Trust vesting periods are extended to infinity. This is automatic.

I live in NSW. But I want a South Australian Family Trust to avoid the 80-year limitation period

Q: We live in New South Wales. Should I set up the Family Trust deed for NSW or South Australia? I ask because South Australia is the only state that does not have a limited life of 80 years for its trusts. And what about the State nexus for the Legal Consolidated corporate trustee company for the family trust? Is there a concern with us being in a different state for the corporate trustee of the trust?

A: Ending a Family Trust triggers capital gains tax and State duties. At the end of 80 7ears, by law, your Family Trust must end.

Legal Consolidated is a national Australian law firm. All Legal Consolidated Family Trusts updates, Unit Trusts, Bare Trusts, Companies and Partnership Deeds work throughout Australia.

You are correct. All Australian trusts (other than Self-Managed Super Funds) only have a life of 80 years. However:

• if your Family Trust is established in South Australia the Legal Consolidated Family Trust deed automatically allows the Family Trust deed to operate to infinity. See section 61 Law of Property Act 1936 (SA). In other words, the trust does not stop after 80 years.
• Also, if the Laws of Perpetuity are abolished in a certain state then the Legal Consolidated Family Trust automatically extends the Family Trust to infinity. I made a prediction in 1988 that every State will abolish the silly 80-year rule by 2040. Ok, I have not yet been proved correct. But I think it will still happen.

What does it really matter? You are dead within 80 years. And for most of us, our children are dead. And finally:

• 94% of family trusts are vested and wound up earlier than 80-years
  (This is how to get rid of an old Family Trust.)
• 84% of Unit Trusts are vested before the 80-year period
  (This is how to get rid of an old Unit Trust.)

So, I do not see the 80-year life of a trust restriction as a major problem.

Further, while the Perpeituty rules are abolished in South Australia, the Supreme Court can order the vesting of the family trust after 80 years. This is under section 62 Law of Property Act 1936 (SA). Further, an application may be brought by the Attorney-General, a trustee or other defined persons who might be expected to be potentially interested in the trust property. So if you have an enemy in the ranks, the abolition of the rule in SA may be of no comfort.

Setting up your Family Trust in WA, QLD or SA to escape paying stamp duty in NSW and Victoria

On a similar issue, you may want to set up your Family Trust in a State that does not suffer stamp duty. This is because NSW, Victoria, Tasmania and Northern Territory still charge (stamp) duty on your Family Trust deed.

However, I also do not think paying $500 (NSW) or $200 (Victoria) to be that much of an issue. This is when compared to the tortuous journey of trying to set up the corporate trustee and Family Trust under another state’s law. The parties need South Australian addresses. And the Legal Consolidated corporate trustee nominates South Australia as its jurisdiction. However, we do not give advice in this area.

How do I prove that the Settlor paid the Settled Sum to the Trustee?

Q: How is the Family Trust Deed is settled? Who is the settlor? How is the Settled Sum of $10 transferred to the trustee? The trustee at this initial stage is just a company without a bank account.

A: Start building the Family Trust deed to get the full answer. There are hints on this topic.

Many Family Trusts never open a bank account. So, get a $10 note (Settled Sum) out of your wallet and put it in the pages of the Family Trust deed, if you are that concerned. But the Family Trust contains on page 1 the receipt by the Settlor to the Trustee. It confirms the Settled Sum is paid. Have a look at the Sample of our Family Trust deed.

Who prepares the Family Trust’s annual tax returns?

The Legal Consolidated Family Trust comes with the Deeds, Minutes, Trust Distribution Minutes etc… as required by your accountant to attend to the annual tax returns.

To put funds into the Family Trust should we lend or gift the money into the Family Trust?

Speak with your accountant as to how you fund the Family Trust. There are asset protection, Centrelink and divorce issues. You can build a:

1. Deed of Gift, or
2. Loan Agreement.

How often do I need to update my Family Trust deed?

A Family Trust deed needs a regular update. You need to update your Family Trust deed every 5 to 7 years. This is particularly the case when there is a change in the federal government.

The only document you may want to update each year is the Trust Distribution Minute. And if you decide to buy land in a certain State then you need to update the Family Trust to deal with the ‘foreigner’ rules for stamp duty and land tax.

Obviously, if you want to change the Trustee, Appointor or the Name of the Family Trust then you need to do another Deed of Variation. A Legal Consolidated Family Trust deed is designed so that any specialist tax lawyer can amend the deed. So, you do not need to come back to Legal Consolidated to do these updates.

Advantages in building a Legal Consolidated Family Trust Deed

We specialise in taxation and trusts. We hold university professorships and doctorates in these areas. We ensure:

1. Streaming – franking credits, attribution and separate accounts to reduce CGT & income tax, complies with Thomas v FCT [2017] FCAFC 57
2. Bamford’s Case – definition of Net Income – satisfies ATO
3. Loss Recoupment – retain and stream losses to particular beneficiaries
4. Appointors to act unanimously – so two Appointors can’t take the assets over the 3rd Appointor
5. Bank loans to the Discretionary Trust – the required bank clauses and Indemnity rights (CBA, NAB, ANZ & Westpac)
6. Bank loan Compliance Certificate signed on our law firm’s letterhead

In whose name do I buy the asset?

For Legal Consolidated Family Trusts (and for most family trusts, but not all) the Trustee purchases the asset in the name of the Family Trust. For example:

A company is the trustee of the Family Trust. How does it buy a property?

Kevin Marine Pty Ltd ACN 2837383893 as trustee for the Jan Jackson Family Trust ABN 383939938838

A human is the trustee of the Family Trust. What do I put in the contract of purchase?

Helen Keller as trustee for the Henry and Helen Keller Discretionary Trust ABN 383030393838

The expression ‘as trustee for‘ can be abbreviated to ‘atf‘.
For example, Mary Jenny Smith and James Smith atf the Smith Family Trust ABN 838383999333

‘ACN’ stands for ‘Australian Company Number’. All Australian companies have their own ACN.

The expression ‘ABN’ stands for ‘Australian Business Number’. If the Family Trust is trading then it usually has an ABN. Putting in the ABN when purchasing an asset helps identify the trust. There are a lot of Family Trusts in Australia with the same name. For example the  ‘Smith Family Trust’.

Can I make an offer to buy an asset before I set up the Family Trust?

You must wait until you build and sign your Family Trust before you do anything with the Family Trust.

And if you are also building a company to be the trustee of the Family Trust then wait until your company is incorporated. Then wait until you have built and signed the Family Trust. And only then can the Family Trust make an offer to buy an asset.

What do I get in a Family Trust Deed?

Within seconds of building the Discretionary Trust Deed online you get via email:

1.  The law firm’s covering letter – confirming our law firm authored the family trust.
2. Trust Opinion Certificate on our law firm’s letterhead, signed by one of our lawyers. This is required by your bank.
3. Family Discretionary Trust Deed setting out the rules of your trust, naming the Trustees and Appointors.
4. Minutes to set up the Trust, as required by your accountant and the ATO.

Any Stamp Duty on a Family Trust deed?

There is no (stamp) duty in South Australia, Western Australia, Queensland and the Australian Capital Territory. You do not need to lodge the Family Trust Deed in those States. They are not ‘dutiable’.

Sadly, these four jurisdictions still charge this ‘nuisance’ stamp duty:

• • New South Wales stamp duty on a Family Trust – $500

The NSW government charges a fixed fee of $500. You or your accountant must lodge the Family Trust Deed within 3 months. This is from the date of signing. The cost is $500 plus $10 for every duplicate trust deed.

In our covering letter that comes with the Family Trust Deed, we recommend that you print out two copies of the Family Trust Deed. This is one for you. And one for your accountant. In that instance, the NSW stamp duty is $510.

Pursuant to Section 58, Duties Act (NSW), the duty of $500.00 is chargeable. This is on the establishment of a trust relating to the non-dutiable property. The Settled Sum is normally $10 or some other nominal amount. Such amounts are ‘non-dutiable’ property. See section 58(1) and unidentified property, section 58(2).

The trust deeds that are typically assessed und these sections are referred to as Discretionary/Family Trust Deeds and Unit Trust Deeds

• • Victorian stamp duty on Family Trust deeds – $200

Lodge the Family Trust deed and pay duty within 30 days. This is from the date of signing. This is with the Victorian State Revenue Office.

You pay the duty of $200 for a declaration of trust over non-dutiable property, such as cash or unidentifiable property. The Settled Sum (usually $10) is ‘non-dutiable property’.

• • Tasmanian stamp duty on a Family Trust – $50

• • Northern Territory stamp duty on a Family Trust – $20

In NT, duty is payable within 60 days of execution at a cost of $20 + $5 for each duplicate.

If you are in one of those 4 States, then either you or your accountant arranges the stamping of the Family Trust Deed.

Who stamps the Family Trust deed and who applies for the Tax File Number?

As your lawyers, we are not involved in the stamping of your Family Trust Deed. Normally your accountant arranges the stamping. And usually, your accountant arranges the applications for the Tax File Number (TFN), Australian Business Number and registers for GST, if required.

Australian Business Number for a Discretionary Trust

Are trading or just holding passive income? Speak to your accountant. You apply for an Australian Business Number (ABN) from the Australian Tax Office. You may also apply at the same time for a Tax File Number (TFN) and for GST. These are all free.

Why build the Family Trust with the specialist taxation law firm, Legal Consolidated Barristers and Solicitors?

We are the only law firm in Australia directly providing legal documents online. We do not re-sell a law firm’s template. We are a law firm. Our law firm considers:

1.            The Streaming Provisions in a Family Trust

Since November 1992, the ATO has issued rulings for the “streaming” of income. “Streaming” reduces capital and income tax. For example, you may wish to:

• stream a franked dividend only to the beneficiary George
• distribute capital losses to another beneficiary, Mary
• stream income to a separate group of beneficiaries being John’s children

For this to happen your Trust Deed, according to the ATO, must expressly allow those specific categories:  ‘franked dividends’, ‘capital losses’ and income. This is so that each category retains its individual status when it enters and then leaves the trust. Unless you have streaming everything coming into the trust merges with everything else. It is like when your child mixes the plasticine colours – it all ends up grey. Each type of income loses its individual character.

If there is no streaming in the above example, then a bit of the franked dividend, capital losses and income has to go to George. George doesn’t want and can’t use the capital losses – so it is wasted on him. Also, more income to George is a disaster because he is already suffering the highest marginal tax rate. George only wanted the franked dividend. But that category of income merges with everything else.

The ATO states that ‘the Trustee must be validly empowered to selectively allocate each category of income’. That is, the Trust Deed itself must contain the ability to stream income. Most old Family Trust Deeds, including many brand new Family Trusts, fail to adequately deal with the full list of categories. Without proper streaming in your trust deed, the categories of income merge and can’t be untangled. The old Family Trust Deed must be updated first.

Here is one example:

Your old Family Trust sells a rental property. It realises a capital gain. This capital gain is received into the Trust. It is part of the Trust’s net income. Correctly drafted, streaming provisions allow the capital gain to be distributed to one particular beneficiary. Another category received by the trust is franked dividends. They are also part of the Trust’s income. However, because of streaming the dividends do not merge with the other categories of income, such as the capital gain. The dividends are not “mixed” with the capital gains tax income. The dividends can be distributed to another beneficiary.

Why does it matter which beneficiary gets different types of income in a Family Trust?

Your accountant may suggest that the dividend (or foreign tax credit) be utilised by a resident individual beneficiary with high marginal tax rates. In contrast, net capital gains are best utilised by another beneficiary with carry forward capital losses, low-income beneficiaries with carry-forward revenue losses and minor beneficiaries able to receive excepted Trust income.

Because of the marginal tax rates and myriad of rules, every taxpayer is unique and benefits from one type of income, rather than another type.

In effect your streaming allows you to distribute one type of income to one beneficiary and another type of income to a different beneficiary.

List of necessary categories for Family Trust streaming

These are the necessary categories that we put in your Family Trust Deed.

Categories a category, character, type, class, part, item or source, including (but not limited to) the categories:

1. Net Capital Gains
2. Net Capital Losses
3. gains
4. profits
5. losses of capital
6. capital profit treated as assessable income
7. allowable deductions under the ITAA
8. Tax Act for the Trust Income for any Financial Year; gains and profits or any losses of capital or of a capital nature that are not treated as assessable income or allowable deductions for taxation purposes for the Trust Income for any Financial Year; any income, receipts, gains or profits or any losses, disbursements or outgoings of income or on income account that are or is treated as assessable income or allowable deductions for taxation purposes in relation to the Trust Income for any Financial Year; any income, receipts, gains or profits or any losses, disbursements or outgoings of income or on income account whether treated as assessable income or allowable deductions for taxation purposes for any Financial Year; any income, receipts, gains or profits that are exempt or otherwise not liable to tax under the Tax Act or any other act or regulation;
9. Franked Dividends;
10. Unfranked Dividends
11. foreign income
12. foreign income tax credit
13. other tax credit
14. interest
15. royalties
16. minors
17. minors who have died
18. proceeds from deceased estates
19. superannuation funds
20. life insurance
21. additional categories set out in any minutes
22. categories mentioned in any Australian Taxation Office publication, from time to time

What categories are required in Family Trust streaming?

Have a look at our ‘Sample document’ above. We have developed a unique group of categories with open classes for streaming. This list is based on the ATO audits we have attended and our legal research.

2.            Franking Credits in a Family Trust Deed

At times your Trust may include gross income from franked dividends. A resident beneficiary in your Family Trust (other than a Trustee of another Trust estate) is entitled to a franking rebate if:

• a share of net Trust income is included in the beneficiaries’ assessable income; and
• some or that entire share of net trust income is attributable to a franked dividend included in the assessable income of the Trust estate.

Notwithstanding wide discretionary powers being conferred on a Trustee, a Trustee’s discretion to selectively allocate dividend income to a beneficiary to the exclusion of another may be fettered by:

• the terms of the Trust deed;
• or by Trust laws in Australian state or territory.

You do not want that. Therefore, we have inserted a clause in your Trust Deed which expressly empowers you to selectively allocate particular types of income to beneficiaries.

Your accountant may suggest that you distribute that part of the net income to those beneficiaries who are able to take the greatest advantage of franking, foreign tax and any other non-refundable tax credits and rebates available to the Trust. Those beneficiaries who have made a loss or are at a low tax rate (especially if lower than the company tax rate) may derive little benefit from these credits.

3.            Family Trust Attribution to distribute capital gain to beneficiaries

When the Trust derives net capital gain in the net income of the Trust, then the Trustee needs the power to distribute that part of the net income to certain beneficiaries. The beneficiaries are treated by the Commissioner of Taxation as having accrued a capital gain. It may be that one beneficiary has carried-forward capital losses and another has carried-forward revenue losses. In this case, there are tax advantages in distributing the net capital gain to the beneficiary who has suffered the prior capital losses.

For some old Family Trusts, the Commissioner may take the view that either:

• both beneficiaries are treated as having been presently entitled to a proportionate amount of the net capital gain and other net Trust income; or
• the net capital gain loses its character and therefore no part of the Trust distribution is characterised as being a net capital gain.

Both outcomes are generally unfavourable. Our Trust Deed allows attribution.

4.            Ongoing extension of the Capital Gains Tax regime in a Family Trust

Your Deed of Variation allows you to account separately and keep separate any funds received from different sources. Your Trust Deed is amended to allow the Trustee to account separately and keep separate any funds received from different sources. For example, sources may include:

• capital gains
• any dividend income (of all natures)
• income having an allowance for depreciation (inclusive of depreciation of buildings and plant and equipment
• any income from Superannuation investments or annuities
• income from deceased estates and Trusts (including testamentary Trusts) whether trading, investment or otherwise
• franked distributions
• credit trading income
• interest
• primary production income
• income from personal exertion
• rents and other property income
• royalties
• foreign-source income

5.            Definition of Net Income in a Discretionary Trust

A Trust distribution often allows you to pay less tax. You normally distribute to the family members that are on the lowest tax rates. If you fail to distribute, then the Trustee (as the taxpayer) pays the tax at the highest marginal tax rate.

You distribute Trust income to the pool of potential beneficiaries. If you do not distribute any part of the Trust income, then the Trustee is assessed on that part of the ‘net income’ at the highest marginal tax rate.

As the court in Bamford v Commissioner of Taxation [2009] FCAFC 66 said:

the only purpose of the concept of “income of the Trust estate” in section 97(1) is to determine the extent of the apportionment as between the beneficiaries and the Trustee. It is not, in itself, a metric by which tax is imposed.

There is a difference between ‘Trust income’ within the taxation legislation. Net income of the Trust estate is the taxable income of the Trust. A beneficiary is entitled to the Trust income. But they are taxed, instead, on the net income.

Your Family Trust deed allows you to:

• define Trust income appropriately; and
• make valid distributions.

6.            Loss Recoupment in a Family Trust

The Trustee has the power to determine not to recoup carried forward losses, to have distributable income, which can be applied to various beneficiaries. If you did not have that power, there could be a situation arising where there is no income of the Trust estate to distribute. According to the ATO, the Trustee is assessed on the capital gain. To make matters worse a corporate Trustee is taxed on the grossed-up capital gain, without recourse to the tax legislation.

Can the Appointor be BOTH mum and dad? Can the Appointor be a company?

Yes, commonly mum and dad are each an Appointor together. You can have as many Appointors as you wish.

You can also have as many Backup Appointors as you wish. The Backup Appointors are generally your children: ‘the union of Dad Full Name and Mum Full Name’.

It is becoming more common to have a company set up as a dedicated Appointor of a family trust. So, instead of mum and dad as Appointors, the company instead is the Appointor. In that case, you and your spouse own the shares in the company. (Obviously, the shareholders have ultimate control of the company, not the directors.) When you die, your children, get everything equally in your Will and therefore control the family trust via the control of the shares in the company. (This is an exemption to the rule that a Will should not control the family trust.) Commonly you would also have a Shareholders Agreement to lock in the rules. If the beneficiaries getting the shares are under age then the executor(s) in mum and dad’s Will control the shares (and therefore the assets in the Family Trust) but only for the minor children’s benefit. (Whether you have a 3-Generation Trust Will the position is the same.)

Can the Appointor and Trustee be the same person in a Family Trust?

Yes, ‘god’ (the appointor) and the ‘puppet’ (the trustee) can be one and the same person. It is very common for a person who is not married and does not have children. It does not offend trust law. Most Australian trusts have 100,000s of beneficiaries.

What happens if an Appointor goes bankrupt?

Legal Consolidated Family Trust deeds and upgrades automatically remove the Appointor. This is if he or she goes bankrupt (human) or insolvent (company). So, for a couple, it is acceptable to have both the ‘spouse of straw‘ and the other ‘spouse of substance be both Appointors. This is from the aspect of asset protection.

Settlor in a Family Trust should a stranger

Q: Is it possible to change/appoint a new Settlor after The Family Trust is created?

A: The Settlor can never change. But do not fuss about the Settlor. He just settles $10 on the Family Trust. And is heard of no more. The Settlor just primes the trust.

Q: Should the same person who controls the Family Trust also be the Settlor?

Absolutely not. The Settlor and his children under 18 years of age can never be beneficiaries of the Family Trust. Therefore, you select strangers or your accountant or financial planner to be the Settlor. It should not be a relative. It should not be an uncle. It should not be your son’s girlfriend. Because your son may end up marrying that girl.

The person that controls the Family Trust is the Appointor. The Appointor hires and fires the Trustee. The Trustee operates the Family Trust. Neither the Appointor nor the Trustee should be the Settlor. The Settlor should be a stranger or someone you do not like.

Should a Will, 3-Generation Testamentary Trust or Testamentary Trust ‘control’ my Family Trust?

It is wrong and foolish to allow your Will (or any trusts formed under your Will) to control the succession of your Family Trust. The only way that you should update or direct who is the controller of your family trust is via a Deed of Update. This is the document you are about to start building. Just press the green button above Start for free to start building the Family Trust deed. Read the hints as you build the document.

My children are under 18 years of age, can I still make them backup Appointors?

After the Appointor or Appointors all die (or go bankrupt or lose mental capacity) your Back up Appointors take over.

If you have one child and expect more children then commonly the backup Appointors are “Child One Full Name” and “Unborn Children”. But what happens if the Appointors all die and there are only under 18-year-olds as the Back-up Appointors?

That is fine. Their position is protected until they turn 18. In the meantime, the minor’s legal personal representative (guardians) holds that position in trust for those minors. However, the Court may direct another person to take charge of the Appointor position. But at all times that person or persons must always act in the children’s best interests. The assets in the Family Trust are protected for minors.

If my spouse and myself both go bankrupt or lose mental capacity we lose control to our Backup Appointors. Do we get it back when we come out of bankruptcy or regain mental capacity?

No, if you go bankrupt or lose mental capacity you do not get control of the family trust back. There are bankruptcy risks to setting up the Appointors succession plan in that way. Choose your co-Appointors and Backup Appointors carefully.

When can the ‘safe house’ spouse be trustee of a family trust?

The general rule is that only fools or a person with no assets take on the risky job of being a trustee of a trust. (Or, for that matter, a director of a company.)

However, each Family Trust depending on what is in it, and how it is used has 3 levels of risk:

1. cash and shares (safe house)
2. real estate (low risk, but there is still risk e.g. occupiers liability)
3. a business (high risk)

The first, cash and shares, has no risk. Therefore, your ‘safe harbour – not at risk spouse‘ can be the trustee.

However, it is an asset protection disaster if your ‘safe harbour’ family trust ever acquired real estate or a business.

Obviously, for a Family Trust running a business, consider removing even the ‘spouse of straw’ as the trustee. And put in a company as trustee of the Family Trust.

If I am the trustee, appointor and default beneficiary is there still a trust?

If the sole trustee is also the sole beneficiary then there can be no trust. To have a trust you need a ‘trustee’ to hold the legal ownership of an asset ‘in trust’ for a beneficiary. But do not worry. Most Family Trusts have over 400,000 beneficiaries – including the 38,000 charities in Australia. So, you can be the trustee, appointor and default beneficiary. That is how I set up my Family Trust before I got married.

Can a Famly Trust borrow money?

Yes, irrespective of who is the trustee, your Family Trust can borrow money. If there are not sufficient assets in the Family Trust then the bank may ask others in your family group to guarantee the debt. Or you may need to put up your family home as security.

Do I have to name every beneficiary in a Family Trust

Q: When establishing a family trust, it is difficult to anticipate just who will be the beneficiaries of the trust. This is throughout the years that the trust operates.

A: In McPhail v Doulton [1971] AC 424, the salient issue of the case is the validity of a non-charitable trust where the objects of the trust (beneficiaries) are described by description, rather than by name.

The decision of McPhail v Doulton

In the judgment, Lord Wilberforce states test for “certainty of objects”. [An ‘object’ is just another name for ‘beneficiary’.] This is for discretionary trusts. Previously, it was believed that to be a valid discretionary trust the trustee had to be able to draw up a “complete list” of all the possible beneficiaries of the trust. This is at any given time.

What if the trustee is not able to do so? It was thought that the trust is void. Lord Wilberforce held that, provided the terms of trust enabled the trustee to identify at any given time whether any person was “in or out” of the class of potential beneficiaries the trust is valid.

The decision in McPhail v Doulton proved influential in Australia as establishing family trusts by nominating one or more primary beneficiaries and then describing the remaining non-charitable beneficiaries by reference to an association or relationship with the primary beneficiaries has become the norm.

Ironically, because of subsequent legislative changes, the use of discretionary trusts is far less common in England these days than in jurisdictions such as Australia.

If I form a company later, is it automatically a beneficiary of my family trust?

Let’s be clear on how you are using the expression ‘company’. You can use a company for a family trust in two ways:

1. Company as trustee of a Family Trust: never put any assets in the trustee company. While any company you build is a beneficiary of your family trust – never distribute any wealth to a trustee company. The trustee company often goes down if the Family Trust goes insolvent. See here.
2. Company as a beneficiary: provided this company does nothing other than getting income from the Family Trust then it is protected. This is called a ‘bucket company‘. (Like your non-working spouse, superannuation and safe house family trust) is is another safe house. You can distribute to the company and pay a constant low rate of tax. However, I personally never do this because of the draconian rules set out in Division 7A. See here.

Obviously, it is an asset protection disaster if you ever mixed the jobs of these two companies.

Is a ‘bucket company’ a waste of time? Division 7A

Mum and Dad’s highest marginal tax rate, in Australia, can get pretty high. It gets towards the 50% mark. But a company tax rate is constant at 30% (or less). Therefore, at those higher income levels why not distribute the remaining family trust income to a ‘bucket company’? And just pay this lower constant rate of tax.

A ‘bucket company’ is just another beneficiary of your family trust. There is nothing special about it. Any company you control can be used as a bucket company. And, yes, you can tip in all the surplus income into a company beneficiary. But:

• the money then becomes trapped in the company; and
• if you do not actually pay the money to the company you then have to deal with the draconian Division 7A rules.

This is how to build a ‘bucket company’ for your Family Trust.

With thousands of people included as beneficiaries, do these people have to know they are beneficiaries?

One of my statistics law students calculated that the average adult Australian is, on average, a beneficiary of 13 family trusts. So, obviously, it is not possible to ever know all of your beneficiaries. The classes of beneficiaries are just too broad and ever-changing.

If allocating a distribution does that beneficiary have to know?

Obviously, before you allocate income to a beneficiary you need to get their permission. They must add that “allocation” to their income tax returns. This is the case even if there is no actual payment of the money. (And you need to make sure that they won’t then demand the actual payment!)

But surely the Family Trust must provide ‘natural justice’ to a potential beneficiary?

No. That is not the case.

Natural justice is the right to be heard. This is before a decision is made.

In Karger v Paul, the plaintiff argued that it is implied that she should be afforded a fair opportunity of making representations to the trustees “before they exercised their discretion”.

The court rejected that argument. McGarvie J stated that:

“I see no good reason for importing rules of natural justice into the exercise of discretion by the trustees of the Will.”

When we build a Family Trust do we find our own Settlor?

Yes, you need to find your own Settlor. A next-door neighbour or stranger is best. It should NOT be anyone you are or may become related to. It should not be your son’s girlfriend. Your son may marry the girl. It should not be an uncle or nephew, or auntie. Settlors and some of their relatives can never be a beneficiary.

How do I prove the Settlor paid the Settled Sum?

There is a full answer to this and many other such common questions as you build the Family Trust deed. Start building the Family Trust deed to see the full hint for this particular question.

The Settled Sum is an amount you set as you build the Family Trust deed. It is usually $10. But you can make it a higher figure if you wish. But $10 is normal and fine.

The short answer is that in a Legal Consolidated Family Trust deed the payment and receipt of the Settled Sum is drafted into the Family Trust deed. You need to do no more.

If you wish you can leave a $10 note in the pages of the Family Trust deed. But it is not necessary.

It is also not necessary to put the Settled Sum in a bank account.

In fact, there is no legal requirement to even open a bank account for a Family Trust. A Family Trust. Further, any trust exists whether a bank account is ever opened or not.

If you do not have a Legal Consolidated or Brett Davies Lawyers Family Trust deed then the answer may be different. This advice only relates to Legal Consolidated and Brett Davies’ Family Trust deeds.

Can I add money to the Family Trust after it is formed?

A gift to a pre-existing trust

Yes, you can. See the Australian High Court decision in Truesdale v FC of T 70 ATC 4056.

1. Facts of Truesdale v FC of T

This case concerned the gift of additional funds to a trust. The trust is already set up by the payment of a settled sum to the Trustee by the Settlor.

The donor of the additional funds is a potential beneficiary of the trust. The ATO is quite mean and applied section 102  Income Tax Assessment Act 1936 (ITAA 1936) to the income generated from the new funds gifted to the trust. The ATO assessed the donor of the additional funds. This is on the basis that the donor is also a Settlor. A second Settlor. This is within the meaning of the section and is also a potential beneficiary.

2. The decision of Truesdale v FC of T

Menzies J held that a gift to a pre-existing trust is an addition to the funds of the existing trust. It does not amount to the creation of a new trust. Therefore, the trust fell and the donor of the additional funds falls outside the ambit of section 102. This meant the unkind ATO is not able to assess the Settlor on the income generated by the trust.

3. Implications of Truesdale v FC of T

As a result of the decision in Truesdale v FC of T, it has become the norm for Australian discretionary trusts set up after 1970 to be established by a relatively small settled sum. This is paid by a stranger. It is a person who is never a potential beneficiary of the trust. The trust is then funded by loans and gifts to the trust. These are made after starting the trust. This is by potential beneficiaries or persons wishing to benefit potential beneficiaries.

Should beneficiaries disclose trust allocations to Centrelink – even though they never actually see any money from the trust?

Yes, of course. As soon as a beneficiary becomes ‘presently entitled’ to trust money they must disclose it to the Family Court, ATO, Centrelink and the Bankruptcy Court. Also, the Family Trust has an obligation to pay the money if demanded by the beneficiary. The beneficiary must pay tax on the allocation – even though it may never be physically paid to the beneficiary.

Centrelink deprivation rules restrict how much a pensioner can gift. But are there limits on how much a pensioner can gift to a Family Trust?

Nice try. But that does not work. Whether the aged mother is handing money to you or your family trust it still suffers the deprivations rules.

Also if your pensioner mum even smells like she is somehow in control of the Family Trust then Centrelink deems her to ‘own’ 100% of the assets in the Family Trust. Remove pensioner Mum from being the Trustee or Appointor here. And wind up your mum’s old Family Trust here: 

Can the Family trust Distribute capital, as well as income?

Yes, of course. The Appointor tells the Trustee to distribute capital (corpus) and income. This is as the Appointor sees fit. Obviously, there may be tax issues such as Capital Gains Tax. But the Appointor has that power. The Appointor is god. 

Does the Family Trust allow me to make distribution on paper making them only ‘presently entitled’?

Yes, of course. That is pretty much the main way Family Trusts operate. You use your children’s low tax rate. But you do not actually give them any money. We explain ‘presently entitled’ here.

Does the Family Trust allow me to distribute to the Director (my wife) of the corporate trustee?

Your wife is the woman of straw. You are the man of substance. This is a good asset protection strategy. To strengthen the strategy you have a corporate trustee. This is for your family trust. Are directors of corporate trustees also beneficiaries under a Legal Consolidated Family Trust? Yes, they are. You have about 400,000 beneficiaries in a Family Trust. So your wife would generally be a beneficiary. The fact that she is also doing another job of being a director does not stop her from being a beneficiary. She can wear more than two hats.

Distribute but then retain the trust income for future expansion?

Q: My Family Trust owns ASX-listed shares. I know my Family Trust must distribute all income each year. Otherwise, the Family Trust trustee is taxed at the highest marginal tax rate. But I want to retain a large proportion of these dividends back into the Trust Account. This is so the trust can purchase more shares.

A: That is fine. Provided there is a ‘present entitlement‘ for the beneficiary and the beneficiary actually declares that income (and the imputation credits). Then the income can remain in the Family Trust. But do not forget to have the debt forgiven.

Does my accountant really need to be involved in any way?

You can build the Family Trust (and corporate trustee, if required) yourself. You do not need an accountant to build the Family Trust for you. However, I have 6 degrees. Four of them are in tax. But, I have never done my own tax return. I use an accountant. Your accountant is your helper and it is good to get their advice.

Any limits on the assets that the trust can invest in?

Unlike Self-Managed Superannuation funds which have restrictions, your Family Trust can hold almost any asset. A Legal Consolidated Family Trust deed has no restrictions on what it can invest in. This includes Australian and overseas shares. 

Unlike superannuation funds, trusts have no contribution limits. You can put as much or as little into the Family Trust as you wish. There are also no borrowing limits.

Does the Family Trust Deed mention AASB15 “Revenue from Contracts with Customers”?

As of 1 July 2021, non-listed companies are no longer allowed to prepare Special Purpose Financial Statements (SPFs). Instead they prepare the arduous General Purpose Financial Statements (GPFS). Small proprietary companies where 5% of their shareholders request GPFS to be prepared are included in the definition of companies that comply with this requirement.

This requirement also applies to SMSF, Trusts and Partnerships, but only where the founding Deed makes mention of AASB15 in its definition of income.

Happily, Legal Consolidated documents do not mention AASB15 in the definition of income.

Further, no Legal Consolidated documents require compliance with the arduous AASB15. 

Which persons carry the burden of being a fiduciary?

A fiduciary holding a position as a fiduciary (excuse the tautology) must act in the best interests of someone else. The position is one of ‘upmost good faith’.

For example, a lawyer, such as myself, is a fiduciary. We must act in the best interests of the client. A lawyer’s interests are subservient to the needs of the client. It is an obligation that you would expect a parent to owe to a client.

Now let us see who holds a fiduciary obligation in a Family Trust:

• Is the Settlor a fiduciary? No. Powers reserved to a settlor are personal powers. They are not fiduciary powers (Kennon v Spry [2008] HCA 56)
• Is the Trustee a fiduciary? Yes. Most definitely. All trustees for any trust hold that job for the benefit of the beneficiaries. The Family Trust’s Trustee’s powers are subject to the fiduciary obligation. This is to act in the Family Trust’s beneficiaries’ best interest. This is at all times. Therefore, the trustee is subject to a fiduciary duty to the beneficiaries in the exercise of those powers. (Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 609 per Waddell CJ in Eq.)
• Is the Appointor a fiduciary? Usually, but not always, the powers vested in an Appointor are fiduciary. (Vestey’s Executors v IRC (1949) 1 All ER 1108 at 1115 per Simonds LJ; Ford & Lee Principles of the Laws of Trusts at [8180]
  • ‘An Appointor is a fiduciary. And is in breach in discharging and appointing trustees in the hope or expectation that the new trustees will prefer some beneficiaries to others.’

Can a beneficiary disclaim or renounce their entitlement to Family Trust income?

---

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm

National:   1800 141 612
Mobile:      0477 796 959
Email:       [email protected]

---