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 between family members, protect assets from creditors and provide succession planning. They are useful in wealth creation and retention.
A ‘discretionary trust’ and ‘family trust’ is the same thing. A family trust has “no fixed meaning and is used to describe particular features of certain express trusts”. See Cmmr of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226
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.
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
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 thing. They are just different words for the same document.
A trust must have a trustee and a beneficiary. A Family Trust has both of these as well as an 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. 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.
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. 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 no rights. The more beneficiaries the better.
The class of beneficiaries are “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.
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 becoming beneficiaries! But, again, do not worry. These beneficiaries have no rights. The only person of power is the Appointor. The Appointor bosses the Trustee. The Appointor tells the Trustee what to do.
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 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 and Bare Trusts. 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:
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.
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, in its discretion. But it rarely does so. See Smorgon v ES Group Operations Pty Ltd & Ors  VSC 608.
Consider Wang v Cai  NSWSC 1162. A beneficiary has concerns as to the maladministration of the trust. The court rejects the request for information about the trust.
A beneficiary does not hold an equitable interest in the trust assets.
But each beneficiary of a discretionary trust has the right to:
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 not rights to any specific assets in the Family Trust.
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 (beneficiearies) 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)
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.
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.
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 use 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.
Q: I want to create a discretionary trust for myself, fiancé and our future children:
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:
Consider these 4 examples:
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.
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.
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?
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):
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.
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.
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. 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.
Unlike a superannuation fund, holding assets within a trust doesn’t necessarily lock them away for years. If you are young and need flexibility then a family trust is often used to hold assets outside superannuation. Often your accountant and adviser interchanges 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 isn’t maximising super contributions, often they shift assets from the trust into super.
Our Family Trusts have unique and 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:
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.
Robert is the accountant. He is the Settlor of his client’s family trust. (Which is common.) Robert buids 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 begining 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 holidays on a 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.
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.
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.
Superannuation is a wonderful tax haven. The tax rate, going in, is 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.
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:
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 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.
There is only one power in a Family Discretionary Trust. That person is the Appointor.
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.
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 Back-up 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 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 Back-up 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.)
Q: We are a step family. We have one “ours” child (Ralf), and one “hers” child (Mary) from a previous defacto 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.
Myself (Peter) and my current wife (Eva) are going to be the joint Appointors.
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
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‘.
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 concern with us being in a different state for the corporate trustee or the trust?
You are correct. All Australian trusts (other than Self-Managed Super Funds) only have a life of 80 years. However:
What does it really matter? You are dead within 80 years. And for most of us, our children are dead. And finally:
So, I do not see the 80-year life of a trust restriction as a major problem.
On a similar issue, people often want to set up their Family Trust in a State that does not suffer stamp duty.
I also don’t think paying $400 or less to be that much of an issue. This is when compared to the tortuous journey of trying to artificially set up the corporate trustee and Family Trust under South Australian law. You would want the parties to have South Australian addresses. And you would want the Legal Consolidated corporate trustee to nominate South Australia as its jurisdiction. We do not give advice in this area.
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 is a 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.
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.
Depending on how you build either of these document you can use the same Deed of Gift and Loan Agreement over and over again.
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.
Our lawyers are elite taxation and trust lawyers. We hold 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  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
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:
Kevin Marine Pty Ltd ACN 2837383893 as trustee for the Jan Jackson Family Trust ABN 383939938838
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’.
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.
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.
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:
The NSW government charges a fix 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), duty of $500.00 is chargeable. This is on the establishment of a trust relating to 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
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 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’.
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.
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 registering for GST, if required.
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.
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 the law firm. Our law firm addresses:
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:
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 merge 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 is 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.
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:
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.
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:
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:
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.
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 outcomes are generally unfavourable. Our Trust Deed allows attribution.
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:
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  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:
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.
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 Back-up 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.)
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.
If you are married, then from an asset protection point of view, it is better to have ‘low risk of bankruptcy mum’ as Appointor. And make ‘high-risk business owner dad’ the trustee or director of the corporate trustee.
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.
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.
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 blue-button above to start the process. Read the hints as you build the document.
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 is 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) hold 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 the minors.
No, if you go bankrupt or lose mental capacity you do not get control of the family trust back. There are bankruptcy risks to set up the Appointors succession plan in that way. Choose your co-Appointors and Back-up Appointors carefully.
There are 3 levels of risk: 1. cash and shares 2. real estate and 3. a business. The first, cash and shares, has no risk, therefore, your ‘safe harbour – not at risk spouse’ can be the trustee. However, it would be an asset protection disaster if your ‘safe harbour’ family trust ever acquired real-estate or a business.
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.
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 groups to guarantee the debt. Or you may need to put up your family home as security.
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  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.
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.
Let’s be clear on how you are using the expression ‘company’. You can use a company for a family trust in two ways:
Obviously, it would be an asset protection disaster if you ever mixed the jobs of these two companies.
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.
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.
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!)
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  AC 553.
In Gartside, the court held that beneficiaries of a family trust:
This is confirmed in many cases. Karger v Paul  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”.
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.”
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.
There is a full answer on 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 not 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, in fact, 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.
Yes you can. See the Australian High Court decision in Truesdale v FC of T 70 ATC 4056.
This case concerned the gift of additional funds to a trust. The trust 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.
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.
As a result of the decision in Truesdale v FC of T, it has become the norm for Australian family and other 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.
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.
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 to here 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:
There about 400,000 beneficiaries in a modern Australian family trust. The ‘classes’ of beneficiaries include ‘parents’, ‘children’ and ‘great, great, great-grandchildren. The ‘classes’ are numerous and drafted as wide as possible.
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.
Yes, of course. That is pretty much the main way Family Trust’s operate. You use your children’s low tax rate. But you do not actually give them any money. We explain ‘presently entitled’ here.
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 are 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 being a beneficiary. She can wear more than two hats.
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.
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.
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.
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.
A who is a fiduciary must ‘act in the best interests’ of someone else. The position is one of ‘upmost good faith’. For a Family Trust:
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]