Family Trusts and Personal Estate Planning: why we don’t gift trust assets in your will
A family trust, (also known more properly as a discretionary trust), is a legal relationship established to hold and manage assets (such as property, investments, a business or cash) for the benefit of a group of individuals or beneficiaries. As the name suggests, usually within a family.
Family trusts are popular in Australia because of their asset protection, tax planning and income streaming, and generational planning qualities.
How does a family trust work?
The trustee has the legal ownership and control of the trust assets, but they must act in the best interests of the beneficiaries and follow the terms and conditions set out in the trust deed.
These trusts are called “discretionary trusts” because the trustee has the discretion to exercise their role, including importantly with these two decisions:
1. What investments the trust has, and the terms of these investments. For example:
a. if a trust has property the trustee gets to decide the terms of the lease, or whether the property needs capital maintenance and how this will be paid for; and
b. the trustee could also change investment types. Such as selling property and investing in shares instead.
2. How income generated by the investment of trust assets (or capital generated by the sale of trust assets) is shared between the trust beneficiaries. For example:
a. if the lease of a trust property, or the ownership of a business, within the trust generated profit or income of $100,000 each year the trustee gets to decide which beneficiaries get which amount from the trust. Such as 40% each to Mum and Dad, and 10% each to two children.
b. The trustee is not bound to make distributions to anyone, and is not bound to make distributions equal within a category of beneficiaries.
What are the benefits of using a family trust?
1. Control and flexibility: One of the key advantages of a family trust is the control and flexibility it provides. The trust deed will set out rules for the trust's operation that allows for tailored asset management and the ability to adapt to changing family circumstances.
2. Tax planning: The discretionary nature of the distribution of trust income and capital means that every year the best strategies from a tax perspective can be considered and applied. By distributing income to beneficiaries in lower tax brackets or applying specific tax strategies, families can potentially reduce their overall tax liabilities.
3. Asset protection: Another significant benefit of family trusts is asset protection. By holding assets in a trust, they are separated from the personal debts, financial and relationship risks of the beneficiaries. This means that trust assets may be safeguarded from creditors and potential claims.
4. Generational transfer of wealth: because trust assets aren’t owned by individual beneficiaries when a beneficiary dies the ownership of the asset doesn’t change. The benefits generated by that asset will continue to flow to other beneficiaries in the trust, ideally through generations.
How your family trust will interact with your personal estate planning
The answer to this question will depend on whether you merely benefit from a family trust (as a beneficiary), or exercise a controlling role in the trust (such as by acting as a trustee or appointor).
But in general, even if you are the trustee and the trust assets are in your name in this capacity (as trustee for the family trust) when you die those assets don’t come into your estate to be dealt with under the terms of your will.
Only assets owned by you personally will form part of your estate.
A great way to think about the separation of personal and trust assets it is in terms of tax file numbers “TFN”. You as an individual will have a TFN. A trust will also have a TFN. When you die, only assets that are linked to your personal TFN will come into your estate and be dealt with by your will. Assets owned by you for the benefit of the trust (and which come under the trust’s TFN) will continue to owned for the benefit of the trust, but the control of the trust (the trustee role) will need to change and a new trustee will be entitled to hold those trust assets in place of the deceased trustee.
In short, on the death of a trustee of a family trust the nature of the trust relationship doesn’t change, just the people in control. And in the case of the death of a beneficiary, nothing changes except for there being one less person for the trustee to consider making distributions to.
Family trusts also offer advantages in terms of estate planning and probate avoidance. Since the trust is a separate legal entity, assets held within the trust are not typically subject to probate, which is the court-supervised process of distributing assets according to a person's will. One of the benefits of a family trust being separate to a personal estate is that where the estate of an individual is likely to be challenged (where there is a dispute about the will, or who was gifted what amounts) the trust assets won’t be pulled into this dispute.
How do we include family trusts in our work?
We do include some critical additional powers and clauses in the wills and enduring power of attorney of trust controllers and beneficiaries when they do personal estate planning. But as a reminder we DO NOT gift trust assets in the will.
We refer to the work we do with family trusts as “succession planning” and it is a strategic conversation about who should be in control of the trust after the incapacity or death of a key member of the trust. We will explain the options in Part 2 of this blog post.
Note- this is general advice and the terms of every family trust are different
It's important to note that family trusts require careful planning and ongoing management.
Professional advice from legal and financial experts is crucial when considering creating a family trust, and planning for the death of key people in the trust.