A family trust is one of the most popular ways to safeguard assets for your loved ones.
Types of trusts available include discretionary trusts, non-discretionary trusts and revocable trusts.
Family trusts are known for their benefits (e.g. asset protection and tax benefits) but they can also be used as a vehicle to purchase a property.
This article looks at how a family trust protects your property and how it can help you buy a new one.
What is a family trust?
The family trust is an estate planning tool that allows you to pass on your assets to beneficiaries after your passing. It is set up to ensure that certain property or money remains in the hands of a person who survives you.
The main benefit of setting up a family trust is to protect these assets from creditors and ensure that they are safe after your passing. It can also be used to ensure that the correct people receive their share of the estate after your passing.
You can also use this option to avoid your assets reducing in value due to inflation or other factors.
The discretionary nature of a family trust makes it different from other types of trust. The trustee can make decisions at their discretion on the distribution to the beneficiaries of trust income and capital following the family trust deed.
Transferring assets into a family trust can ensure their future financial security by allowing you to retain control over the assets until the time comes for their distribution.
How do I set up a family trust?
Draft a trust deed with the assistance of a lawyer and an accountant. It should outline the terms of the trust including:
- how it will be managed;
- how the assets will be administered;
- specifying the beneficiaries; and
- what the beneficiaries will get from the trust.
Appoint an individual to be your trustee. It can be a trusted person, a family member, or a professional who can carry out their obligations in good faith and in the best interest of the beneficiaries.
At a meeting, the beneficiaries and the trustee formally accept and sign the trust deed. This also gives the beneficiaries an opportunity to discuss the Memorandum of Wishes, which sets out the way in which trust income and assets are to be distributed.
The trust deed is settled by placing a sum of money in the trust account through a settlor. Apply for an Australian Business Number (ABN) and Tax File Number (TFN) and open a separate bank account (required to carry out the business of the trust).
All documents (including the trust deed) must be stamped and the stamp duty must be paid.
How do I use a family trust for property investment?
The first step is to decide on the type of family trust that suits your needs. There are two ways in which your family trust can help you with your property investment:-
Financial Benefit
A family trust provides financial benefits, including additional control over asset management and tax advantages. You can use it to rent out, transfer, buy or sell the ownership of a property without any stamp duty or tax implications.
A trust can be used to split profits among beneficiaries. The trustee has discretion as to the distribution of rental income.
A trust can also help you benefit from the capital growth on your investment properties. Gifts can be made capital gains tax-free (i.e. all gifts made within a family trust are exempt from capital gains tax).
Asset Protection
A family trust is designed to protect property from creditors and future liabilities, such as family law property settlements.
The property is owned by a trust, so creditors, banks, and other financial institutions cannot pursue it even if some of the beneficiaries declare bankruptcy.
It can also be used to create an inheritance for children who don’t qualify for an individual trust. You can pass on your house to your children, even if you have no direct descendants. The beneficiary’s ownership of the property would be as a tenant-in-common who would be able to transfer or sell the property.
How do I transfer property ownership to a family trust?
What if you’ve already purchased properties and you’re looking for asset protection strategies? If you’ve already set up a family trust, you can use it as a vehicle to purchase a house.
You can transfer the title of property from individuals to the trustee who becomes the new legal owner.
You can gift or sell the property to the family trust. Gifting and selling differ in their benefits and implications: you must choose what is best for you and your family.
Signing a gift deed transfers ownership of a property to a family trust without payment. Having an outstanding home loan on the property may complicate the process.
Another way to transfer ownership is to sell the property to a family trust. This is the same as any real estate transaction, except that you are the seller and the trustee is the buyer. Regardless of whether you sell it at or below market value, you may still be liable for the capital gains tax.
Conclusion
A family trust helps you maintain control over your assets so that only those entitled to the assets under the terms of the trust document can own or sell them.
It’s a great tool to help you protect family assets, minimise liabilities on your property, and share profits amongst your loved ones.
Where to now?
Contact us for advice and assistance establishing a family trust.
