Family Trust Australia Explained - Pros & Cons - YouTube

So I've spoken about sole traders. I've spoken about companies.

Now, I think it's a good time to dive deep into talking about family trusts.

So a family trust is basically an entity that would hold family assets

or businesses or business assets on behalf of its beneficiaries.

So basically on behalf of the family members.

So family trusts are setup for a number of reasons.

One could be because you're planning to invest in property and collect rent

or do rental income and expenses or do some property development.

There could be because you're planning to invest in a business and you want to own the

assets and the business in the trust.

There are also cases where you want to distribute profits or income to

your children or family members but at a particular point of their life.

There are a few key components of a trust.

The first thing you would see is you have a settlor.

A settlor is basically a person that establishes the trust and sets it up.

Then, you would also have a trust deed. So a trust deed in my eyes is really just

a rulebook of the trust and it's basically signed by the beneficiary and the trustee.

So the trustee is the ultimate controller of the trust,

they also are responsible for the assets of the trust as well.

And lastly, we also talked about beneficiaries. So beneficiaries are the people that benefit from the trust.

So more than likely it's the family members and the people related to the family members.

So now that you know the components of a trust,

let me briefly go into why a trust could be beneficial for your current situation.

So the first thing that a lot of people talk about is that

a trust is beneficial for asset protection.

You're splitting your assets away from your personal name and as a result anything were

to happen to you more than likely would not affect the assets owned by a trust or by another entity.

Another side benefit of having a trust is that there are ways to manage your tax effectively.

So there are options where you can distribute your income that's

earned in the trust to different family members that at a lower

tax bracket, and as a result you're more than likely minimize your tax.

But you got to be careful with that because there are laws and

strict laws with trust and tax and as a result you've got to speak to

an accountant to ensure that you are doing the right thing with the trust.

Another benefit of having a trust is distributions of your income.

You have the flexibility to decide which beneficiary, so which person or which family

member gets to receive the profits from the trust or the income from the trust.

So that's really great when you have kids that are low income earners or

you want to distribute some money over to your kids at a certain age.

So the last thing that could be very beneficial

is that you can also access Capital Gains Tax exemptions or concessions.

When you own an asset for more than 12 months, you have the ability

to discount your capital gains by 50%, so that's usually only given to individuals.

Companies don't get that 50% discount but a trust does because the trust can

be distributed to individual and as a result they also get that CGT

discount of 50% if they've owned that asset for more than 12 months.

So it's actually quite great when it comes to owning assets.

Okay so I jumped in about all the benefits but then there are unfortunate cases where

there are disadvantages for a trust and it may not be suitable for your situation.

So first thing about having a trust is is very complexed.

So as a result it's costly, it costs roughly around $2,000 to set up a trust and you also

may need to set up a corporate trustee which is a company that controls the

trust and on top of that on an annual basis you'll have to do the admin work.

So you have to do the bookkeeping you also have to

do the accounting and lodge tax returns. And it could cost anywhere between $1,000

at bare minimum all the way to $2,000 - $3,000 in accounting fees per year.

So another disadvantage of having a trust and setting up assets and businesses in

a trust is that you actually lose the ownership of those assets in your personal name.

So now these assets aren't actually in your personal name anymore they're

in the trust and the trustee is the one that controls the trust.

So you gotta be careful you do lose the ownership in your personal name.

If you're investing in property in your family trusts then you've got to be very

careful because in some certain states in Australia for example New South Wales

you don't get a Land Tax Free Threshold for your property owned in your trust.

So as a result you actually end up paying a bit more tax which brings me on to another comment

about trust: if you don't implement the trust properly and you don't see an expert or you don't

see an accountant you may do things or the action the trust in a way where you will pay more tax.

So a trustee for a trust pays 45% tax for the income earned in a trust.

So if you don't action it and you don't do the reporting correctly and you don't try to do

some tax planning you can end up resulting to paying more tax overall for your family.

So you've got to look at it very carefully, you've got to speak to an expert and their benefits and

disadvantages of a trust. So that was just a breakdown of how trusts and family trusts work.

But if you're really considering it it's best that you go speak to a lawyer and an accountant

so you can get a better understanding of a trust and if it's suitable for your current situation.