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What is a family trust?
Buying an investment property through a family trust allows you to split profits between family members and pass on ownership without stamp duty costs.
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Family trusts are a common instrument used to invest in property. They can be an effective way to share profits among family members, as well as to minimise tax liability and protect a family's assets. If you wish to set up a trust you need a trust deed and an ABN. You should also consider getting legal advice when setting one up.
What is a family trust?
A family trust is a way to structure finances that removes them from individual ownership and tax liability. It places assets in the care of a third party, who manages the trust on behalf of its beneficiaries.
Assets are transferred to the trust and owned by the trust. The trust appoints a trustee to administer the assets on behalf of the members. It is then up to the trustee to distribute any income derived from the trust to its beneficiaries.
How do you use a family trust for property investment?
A family trust can be used to purchase property, which is then held in the trust for tax purposes. A trust can be used to split profits among family members, and to provide a tax-effective property investment structure.
Family trusts can minimise the tax liability of each individual family member in the trust. If you hold a property in a trust for more than a year, the property is eligible for a 50% capital gains tax (CGT) discount upon sale.
Moreover, trusts allow property to be passed on in an estate in a tax-effective manner. Beneficiaries' shares in the trust can be passed on without incurring stamp duty.
One of the main reasons family trusts are used to hold property is that it shields assets from creditors. Because the property is owned by the trust rather than any of the individual beneficiaries, creditors cannot pursue it even in the event one or more of the beneficiaries declare bankruptcy.
However, while family trusts allow families to share the profits from property, they do not allow beneficiaries to claim losses. This means family trusts do not benefit from negative gearing concessions.
How do you set up a family trust?
Setting up a family trust requires a few documents.
First, a trust deed is required. This document outlines the terms of the trust, govern how it is operated and how assets are administered.
Next, the trust beneficiaries will have to hold a meeting to formally accept the trust deed and the appointment of a trustee. Minutes from this meeting will be used to document each beneficiary's acceptance of the trust deed and trustee.
The next document required is a Memorandum of Wishes. This document outlines the way the beneficiaries wish the income and assets of the trust to be distributed, though this is ultimately the discretion of the trustee. This document can be updated as the needs or wishes of the trust's beneficiaries change.
Next, a sum of money must be placed in the trust by a person known as a settlor. The settlor is a person unrelated to the beneficiaries, and can be an accountant, financial adviser, solicitor or any other third party.
The trust must apply for an Australian Business Number (ABN) and establish a separate bank account. Finally, the documents establishing the trust are filed and stamped by the state government.
What happens to a trust in the case of divorce?
A family trust is not off limits in a divorce settlement. Family courts can issue orders relating to the assets in a trust. This could result in the assets of a trust being divided up between spouses even when ownership of the trust belongs to one individual.
Keep in mind that how a trust is treated during divorce depends on many factors. This information is general information only and you should consult a legal professional when setting up a trust (and remember that your accountant may not be a qualified legal expert).
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