What is a Trust, Discretionary Trust or Family Trust and how does it work?
What is a Trust?
Trusts are means of providing protections and tax benefits for investment and business purposes.
In simple terms, a trust is an obligation on a person or an organisation to hold ‘in trust’ (that is, in custody) property or funds for the benefit of a beneficiary. The beneficiary is nominated by the Trust itself.
A Trust normally appoints a person or an organisation as the Trustee (that is, the person or organisation responsible for the management of the Trust). The Trustee is responsible for managing the Trust’s tax affairs, which may include lodgement of tax returns and payment of tax labilities.
A Discretionary Trust allows the Trustee to distribute the property or funds held in trust at the discretion of the Trustee.
Normally, the Trustee will consider the best distribution to the beneficiaries in order to obtain efficient tax breaks.
A Family Trust, similar to a Discretionary Trust, allows the Trustee to make distributions to family members.
The following persons may be considered to be part of the Family Group:
- Parent, grandparent, brother, sister, spouse;
- Child, nephew, niece;
- Lineal descendants (that is, grandchild, great grandchild) of the person creating the Trust, the nephew, niece; and/or
- The spouse of any person mentioned above.
Effective distribution in a Family Trust allows the beneficiaries to receive income from the Trust in the form of a ‘salaried’ income. If the contribution to the family member is below the threshold of taxable income, that person may not be required to pay income tax, or may be required to pay income tax for a lower threshold.
A beneficiary to a Trust may be person or a corporation.
With effective distribution, both a person and a corporation may allow the Trust to enjoy a lower tax bracket obligation.
Protections of Property and Funds
In addition, a Trust may grant the property and/or the funds held in trust a protection against third parties or family law claims.
For instance, if the Trustee acts outside the authority of the Trust, the Trustee personally may be liable for any losses sustained by the Trust.
How can we assist you?
If you require the protection of your business assets, or have any questions, contact our office on (02) 9723 8080 for a consultation.