The value of a family trust to your business

One of the most common questions I’m asked as a business accountant is, “Do I need a family trust for my business?” Family trusts, generally established as discretionary trusts, are common, but that doesn’t mean they are always necessary. In this article, I discuss the pros and cons of family trusts and who will benefit most from using one.

A family trust holds a family’s business interests or investments. It involves a trustee, often a company set up for this purpose, that legally owns the business or assets and manages them on behalf of the trust’s beneficiaries, usually family members. A misconception is that a family trust’s primary benefit is tax minimisation; however, the key feature is discretion. The trustee can decide how to distribute income or capital among the beneficiaries within the scope of the trust deed. Its flexibility is what gives a family trust much of its value. However, a trust is not a separate legal entity like a company; it’s a relationship where the trustee holds assets for others.

In practical terms, you might set up a company to run your business and then have a family trust own the shares in that company. Profit from the business can be passed as dividends into the trust, then distributed to family members. You can also place investments like shares or specific properties into the trust.

• Asset protection. The most significant advantage of a family trust is asset protection. If your business faces risk such as bankruptcy or potential legal action, claims are generally limited to the assets owned by the trust or company. Assets such as the family home are often insulated. There are director requirements for fraud and other events; however, a family trust structure helps protect your personal assets.
• Tax flexibility and optimisation. While family trusts don’t necessarily minimise tax, they provide a flexible tax optimisation structure. Family members likely fall into different tax brackets. The trust lets the trustee allocate more income to members with lower marginal tax rates. For instance, if one spouse is the primary earner and the other has little or no income, the trust can distribute a portion of the business profits or investment income to the lower-earning spouse. That income will be taxed at her lower rate, utilising the tax-free threshold and lower tax brackets, rather than all being taxed at the higher earner’s top rate. This is tax planning, not tax avoidance.
• Succession planning. Assets held in the trust are not legally part of your personal estate. This means when the primary controller of the trust passes away, those assets don’t go through a will; they remain in the trust. The business isn’t frozen or disrupted by the death of an owner, because technically, the trust, through the trustee company, owns the business. The control of the trust can be passed on, for example, you might have a succession plan where your spouse or adult child becomes the director of the trustee company, maintaining continuity.
• Business growth and investments. Building an investment portfolio, such as shares, managed funds, and even cryptocurrency or investment property, and holding these in a trust can be very effective. The income, interest, dividends, or rent can be distributed each year in a tax-effective way, as discussed. The trust can strategically distribute capital gains if the assets grow in value and are sold. Additionally, if you bring in a partner or sell a stake in your business, having the business owned by the trust can simplify that process from your personal standpoint.

Family trusts are hugely popular in Australia, with an estimated 1 million registered according to the latest data from the ATO. While they offer many benefits, they are not for everybody, and individuals need to know about the potential drawbacks and considerations of a family trust.

• Set up and ongoing costs. Establishing a trust structure costs money and time. Setting up a family trust with a corporate trustee, recommended for liability reasons, can cost around $1,500–$2,500 in legal and administrative fees. This includes drafting the trust deed, registering a company as trustee with ASIC fees, and any applicable stamp duty on the deed, which can vary by state. The trust must file a tax return annually, and you’ll likely need an accountant to prepare financials and distribution statements. Professional fees for maintaining a trust can be a couple of thousand dollars per year, depending on complexity. If this business earns less than the GST threshold $75K pa, operating as a sole trader will be more cost-effective.
• Administration: A trust is more complex than a straightforward company structure. The trustee must strictly follow the terms of the trust deed. According to the deed, income must be distributed to beneficiaries each financial year by 30 June; if not, any undistributed income is taxed to the trustee at the top marginal tax rate, currently 47%. This rule means you can’t easily retain profits in the trust for reinvestment like a company can. Suppose your business needs to retain earnings to grow, buy equipment, or expand operations. In that case, a trust can be a limitation. You’d have to distribute profits to beneficiaries, potentially loan them back, or use a company beneficiary often called a “bucket company,” to hold the earnings at a 30% tax rate. Trust losses cannot be distributed to the family. If the trust’s investments or business makes a loss, that loss stays trapped in the trust to be offset against future trust income; you can’t use it to reduce your personal taxable income. Record keeping is essential. It involves keeping records of trustee decisions, ensuring proper separation of trust assets from personal assets, and possibly dealing with additional regulations. Altering a trust later can be cumbersome and trigger tax implications; in some cases, a significant change could be deemed a resettlement of the trust, which is like creating a new trust and can cause CGT or stamp duty events. So, it’s essential to set it up with a long-term view in mind.
• Not suitable for all income types: As mentioned earlier, if your business income is basically your personal professional income, you’re a consultant, doctor, tradie, etc., providing individual services, a family trust may not deliver tax benefits due to the ATO’s personal services income rules. Those rules ensure you pay full personal tax on income that is essentially generated by your own skills and effort, even if it’s channelled through a trust or company. In these cases, the trust might still serve for asset protection, but you shouldn’t expect significant tax savings if the ATO deems it PSI.
• Impacts of beneficiaries. You need to be mindful of how distributions might affect the recipients. For example, giving a large trust distribution to a retired parent or a grandparent could increase their taxable income and potentially affect their Age Pension or other government benefits. Or if you distribute income to an adult child with a student loan, a higher income could mean they have to start repaying that loan or lose other concessions. While the family might save tax by utilising a lower bracket, always consider the individual’s situation. Fortunately, distributions to a spouse or adult children with no other income can be very tax-efficient and common in family businesses, but just plan it carefully each year.

• Established family businesses: A trust structure can be very effective if you run a profitable small-to-medium business and have family members involved, or at least available to distribute income. It’s handy if the company generates more profit than one person needs. You can spread the financial success across the family. Many Australian family businesses use trusts to allow mum, dad, and adult kids to each receive some income, helping fund the household, children’s university fees, etc., in a tax-effective way.
• Asset-rich investors. A trust is an excellent vehicle if you are accumulating investments such as share portfolios or investment properties, intending to build family wealth. The trust holds the assets, protecting them from any one person’s liabilities, and the income or gains can be distributed to whichever family member makes the most sense each year.
• High-risk professionals or business owners. Entrepreneurs, builders, or directors of trading companies like to keep valuable assets locked away in a trust. Those assets are separate if the trading company fails or faces legal action. Even though, as a company director, you have some personal exposure, a trust is ideal for asset protection and protecting family wealth in scenarios where doing business inherently carries risk.
• Succession planning. A trust is a ready-made succession structure if you want an uncomplicated way to pass a business or investments down to your kids over time. You can gradually hand over control by changing trustees or appointing your children as directors of the trustee company without transferring the assets themselves. It can be a way to provide for children over time, even providing income for their education, or a first home deposit, under the trustees’ oversight, which is why many people describe a trust as a family wealth vault.

• A small or simple business. If you’re starting or the company is modest in size, the costs and admin of a trust might not be justified.
• Single or no dependents. Suppose you don’t have a spouse, children, or other close family to include as beneficiaries. In that case, a family trust offers less tax advantage because all income would likely still end up with you. Some single people use trusts to hold investments for asset protection or future planning, but if tax splitting isn’t an option, the case for a trust is not strong.
• Professionals covered by PSI rules. As discussed, a trust doesn’t save tax if you’re essentially earning personal income and can’t distribute it because the ATO will tax it back to you. You might still use one to hold investment assets separate from your name. Still, you could consider alternatives like contributing extra to superannuation or using a company to cap tax at 30% if you retain earnings.
• If you don’t like formalities. Managing a trust means committing to more formality: separate bank accounts, careful record-keeping, and sticking to the trust deed rules. If that sounds like a headache and your situation doesn’t need it, you might be better off with a simpler structure.

You should think of family trust as a tool: in the right hands and situation, it provides flexibility, protection, and potential tax optimisation, but if used poorly or unnecessarily, it could just add cost and complexity. The primary motive should be protecting family assets and managing family wealth, with tax optimisation as a secondary benefit.

If you’re considering a family trust, discuss it with your business accountant, who knows your circumstances. It’s all about choosing the proper structure for the right reasons.

North Advisory, located on Sydney’s Northern Beaches, is ideally positioned to assist you with expert financial management, taxation planning, and implementing financial strategies, including family trusts.

Marius Fourie, Director and Accountant, is a leading business accountant and advisor who has helped many Australian businesses maximise their financial position.

Contact Marius today and secure your financial future.