Family Trusts: What You Need to Know

Articles: Trusts and Asset Protection Articles

"Family Trusts: What You Need to Know" - by Miles Agmen-Smith

© Copyright ASCO Legal November 2014

The Family Trust: 

The main reasons for forming family trusts are:

1. Asset planning between the generations.

2. Creditor protection.

There is an array of secondary reasons for forming trusts including:

1. Protecting property from relationship property laws;

2. Lessening possible rest home charges;

3. Tax effectiveness;

4. Protecting assets from claims arising under company directors’ duties;

5. Protecting assets from claims arising from statutory duties e.g. Health and Safety in Employment Act, Fair Trading Act;

Just what the trust structure should be and what assets should be transferred to the trust differs depending on your individual circumstances and the main purpose for the trust.

Common Terms Used:

If you feel that a family trust is for you, then you will need to know some of the terms used in a Trust Deed.

Trust Deed

This is the document that forms a trust. It is signed by the settlor and by the trustees and sets out who is to benefit from the trust and by what rules the trust is going to operate.

Settlor

This is the name given to the person who establishes the family trust and gives or transfers property to the trustees.

Trustees

These are the persons who hold the property transferred to the trust on the trusts specified in the Trust Deed for the benefit of the individuals known as “beneficiaries”. In simple terms, the trustees manage the trust assets for the beneficiaries.

Beneficiaries:

In most Trust Deeds three types of beneficiaries are referred to: 

1. original beneficiaries;

2. appointed beneficiaries;

3. final beneficiaries.

The original and the appointed beneficiaries are discretionary beneficiaries. This means they have no right to demand any assistance from the trust, rather they have the right to be considered for distributions of income, capital or both during the term of the trust.

The original beneficiaries are named from the beginning of the trust and will be the only discretionary beneficiaries of the trust unless the trustees use their power in the deed to appoint further beneficiaries from a range of people allowed to be appointed as described in the Deed.

There is usually a wide range of discretionary beneficiaries because this gives flexibility to the trust which could run for as long as 80 years and may have to deal with situations not anticipated at the time the trust was formed.

The final beneficiaries, normally the settlor’s children or grandchildren, are the beneficiaries entitled to share in any assets remaining at the time the trust is wound up.

Power of Appointment

The Trust Deed states who has the power to appoint and remove trustees. The settlor usually reserves this right to him or herself.

Effect of the Trust

Once a settlor has transferred the property to the trustees, the settlor is not longer the owner and has no ownership rights in regard to the property except to the extent of the rights the settlor may have as one of the discretionary beneficiaries.

The trustees are the legal owners of any property gifted or transferred to the trust. The trustees are given a wide range of management and investment powers and the discretion to distribute income and capital to discretionary beneficiaries. The trustees are obliged to act for the benefit of the beneficiaries.

The law does not allow a trust to run forever. Therefore most trusts will have a maximum life of 80 years, but with the trustees allowed to wind up the trust at an earlier date.

Because the trust can have a life of 80 years, it is not affected by your death and can continue to operate.

Because the assets transferred to the trust belong to the trust and not to you, the trust assets are not available for your unsecured creditors and do not form part of your assets.

Transferring Assets to a Trust

It is usual to sell assets to a trust. This is because any gift over $27,000 in any 12 month period incurs gift duty. Therefore the family home, the bach, shares and so forth are sold at market value to the trust and the trustees make payment by acknowledging that the amount is owed to you or giving you a mortgage for that amount.

Whilst any part of the loan is owed by the Trust to you, that portion of the loan is still your asset not the Trust’s. The loan can then be reduced to annually at a rate of $27,000 per annum for each donor. The transfers must be at market value for duty reasons. The transfers must be legally documented and where appropriate, registered in the applicable registries.

We can prepare your Trust Deed and any asset transfer documentation.

Forming a Trust: What we need to know from you

1. Full name, occupation and address of the settlor

2. Full names and occupations of the trustees. In many cases we would recommend an independent trustee as well as you and your spouse.

3. The name of the trust

4. Who your original beneficiaries are going to be – their full names and their relationship to you.

5. A check list of current assets and liabilities including assets are owned in your sole name, by you and your partner as joint tenants or tenants in common.

A family tree covering all the likely beneficiaries is helpful, particularly so where there are blended families.

Armed with the above information we can discuss with you your particular needs and propose a trust structure suitable for your particular situation.

We have prepared this guide to and for our clients. It is not a substitute for detailed advice as every individual situation differs, and also government policies, laws and general conditions constantly change. We are happy to assist anyone who wishes to obtain more detailed advice or information on these or other matters.

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