A family trust works by separating control of the assets from the right to benefit from them. The trustee is the legal owner and decides who receives anything, while the beneficiaries have no more than a right to be considered to receive a distribution ofincome or capital. How far each of those roles extends is set out in your own trust deed rather than in any general rule.
What is a family trust?
A family trust is a discretionary trust, which means nobody is entitled to a fixed share and the trustee chooses who benefits each year. The trust owns its assets. It continues after you die and it can’t be gifted in your Will.
All trusts are unique. Your trust deed is the rule book, so nothing on this page applies to your trust until a lawyer has read the deed and every variation to it and has given you advice specific to your deed.
Who does what in a family trust?
| Role | What they do |
|---|---|
| Appointor, sometimes called the principal or guardian | Ultimate control. Can usually remove the trustee at any time and appoint a new one. May need to consent to certain decisions of the trustee. An optional role, so your trust may not have one. Some trusts have all three names. |
| Trustee | Legal owner of the trust assets and must deal with them according to the terms of the trust deed. Responsible for day to day management and proper administration, with discretion to distribute income and capital to beneficiaries. |
| Beneficiaries | Can receive income and capital, but only at the trustee’s discretion. No right to demand a distribution, only a right to be considered. Don’t own any of the trust assets. |
The trustee generally has absolute discretion over who receives a distribution, provided they give real and genuine consideration to each beneficiary’s circumstances. If you are simply a beneficiary and not the trustee, what you receive is entirely at the trustee’s discretion.
Where the deed allows it, a trustee can also be one of the beneficiaries. Where that happens the trust assets look and feel more like that person’s own assets, because they are in control and can choose themselves or their family to benefit.
Why did you set up a family trust?
You probably set up your family trust for the asset protection and the income tax flexibility, likely on the recommendation of your lawyer or accountant. Here’s a refresher.
Asset protection. Because no beneficiary owns the trust assets and their only right is to be considered by the trustee, it is harder for someone to argue that the trust assets belong to any one beneficiary. If a beneficiary is sued, the assets in the trust may not be available to satisfy a creditor’s claim against them.
Income tax flexibility. A trust is a flow through vehicle for tax. The income earned each year by investing the trust assets has to be distributed to beneficiaries and each beneficiary is taxed on what they receive at their own marginal rate. Each year the trustee chooses which beneficiaries receive that income, so it can be allocated to the people on lower rates.
Can a family trust distribute to children under 18?
A family trust can distribute to a beneficiary under 18, but the tax treatment is punitive rather than generous. Income distributed to a minor from a family trust is taxed at penalty rates above a very small threshold (around $400) , so the income splitting that works well for adult beneficiaries on lower rates doesn’t work for children.
This is the point where family trusts and testamentary trusts differ most. A testamentary trust created by your Will can distribute to a beneficiary under 18 who is taxed as an adult on that income, which is a concession no family trust has.
What happens to your family trust when you die?
Your family trust carries on without you, because the assets belong to the trust rather than to you. What ends is your personal right to control it, so the roles you held fall vacant and someone has to fill them.
Your Will can’t do that work. How control passes depends on what your trust deed says. We have written about this separately in what happens to your family trust when you die or lose capacity.
Frequently asked questions
Can a beneficiary demand money from a family trust?
No. A beneficiary of a discretionary trust has a right to be considered by the trustee, not a right to a distribution. The trustee has to turn their mind to each beneficiary’s circumstances before deciding.
Can the trustee also be a beneficiary?
Yes, if the trust deed allows it, which it commonly does. That person can then choose themselves or their family to benefit, which is why the trust assets feel like their own money.
Does every family trust have an appointor?
No. The role is optional and it goes by several names, so your deed may call it the principal or the guardian, may have all three or may have none.
Can I put my family trust in my Will?
No, because you don’t own it. Your Will deals with what you own personally. What you may be able to pass on is control of the trust. Whether you can do that in your Will depends on the terms of your specific deed.
Send us your trust deed
Your trust deed decides all of this, so that’s where we start. As part of your estate plan, we’ll review your deed and tell you who controls the trust now, who takes over when you die or lose capacity and whether that still suits your family. Call the Wills team on (08) 9220 4433 or book an estate planning consultation to get started.
Related: estate planning for your related entities
This article contains general information about discretionary family trusts. It is not legal advice. You should obtain professional legal, taxation and financial advice about your trust and your estate planning.
