Family trust business structure
Posted by Northadvisory on May 6, 2021
When choosing the best structure for your business, it’s important that you consider what might happen in the future. If you want to build a business that you can pass down to other members of your family, then a family trust structure could provide you with an ideal tax-effective, long-term solution.
We believe that family trusts are extremely useful entities. Many people create them to manage assets and investments, but they often overlook the fact that a family business can be one of the most valuable assets they own.
This is where setting up a trust business structure can be highly beneficial, not only to the current business owner, but also the generations to come.
How is a family trust set up?
In order to set up a trust correctly, you need to have:
- a trustee
- list of beneficiaries
- a trust deed that outlines the relevant governance
- initial assets (also known as the settlement sum).
A family trust is not a separate legal entity. So, to create a trust you will need to appoint a trustee, and they are the legal entity that owns the assets and performs functions on the trust’s behalf. The trustee completes transactions and is responsible for adhering to the trust deed. They must always act in the best interests of the trust beneficiaries.
We often recommend that the trustee is a company and while this might sound complicated, we can guide you through the set-up processes to make sure the structure is correct.
Beneficiaries are the people actually named in the trust deed as entitled to receive distributed income or capital. Typically, these are members of the immediate family or other close relatives. They receive their entitlements either as set out in the trust deed or by the discretion of the trustee.
In addition to the trustee and the beneficiaries, there are two other important roles within the trust. These are:
- the settlor – an independent individual given the responsibility in setting up the trust. They name the trustee, the beneficiaries, and if there is one, the appointor,
- the appointer – whose job it is to appoint, replace, or remove the trustee.
What are the advantages?
Utilising a family trust as a business structure can offer significant advantages.
In terms of flexibility, trusts offer effective tax planning opportunities. The trustee can use their own discretion to distribute income to beneficiaries with the lowest marginal tax rates. This enables them to reduce the trust’s tax rate. Another common situation is if one beneficiary has incurred capital losses, the trust can allocate any capital gains to that individual.
There is also additional asset protection within the trust environment, as no individual family member legally owns trust assets. Assets are the responsibility of the trustee. This means that the trust’s assets are protected from a beneficiary’s third party creditors.
Business succession planning tends to be easier within a family trust structure, as you can pass control to the next generation simply by changing the trustee… or in the case of a company being the trustee, you change the directors and shareholders. A key benefit here is that this transfer should not trigger any tax implications.
Another key advantage is access to small business capital gains tax (CGT) concessions. If you sell the business, there are generous concessions available if you meet one of two eligibility criteria.
These eligibility conditions are an annual turnover of less than $2 million and a total business asset value under $6 million. The flexibility offered by a family trust makes it much easier to meet these requirements.
Seek professional advice
Setting up a family trust business structure is a complex undertaking. There are many considerations to take into account, and we recommend seeking professional advice to make sure that it will suit your needs.
Here at North Advisory, our team has extensive experience working with family trusts, and we are here to help you through the process. If you’d like to find out more or speak to one of our business specialists, please contact us today.