Family Trusts Benefits and Distributions - What You Need To Know

What is a Family Trust?

A Trust is a relationship between a person or organisation (the trustee) who is responsible for holding assets for the benefit of other people (the beneficiaries). It’s a great way to hold investments and protect assets.

To start off, let's delve into the concept of a Discretionary Trust, where the trustees have the power to select which beneficiaries will receive benefits and in what amounts. Specifically, a Family Trust falls under the category of a Discretionary Trust designed to safeguard a family's assets or oversee a family business. Usually overseen by one or multiple family members, the Family Trust distributes its taxable income among various family members to benefit them collectively.

Common Uses for Trusts

Trusts are flexible and widely used for investment and business purposes. In a Trust, it is possible to give different people rights to the income and capital and despite not being a legal entity, there are a wide range of activities that a Trust can be used for including:

• Running a business
• Owning property
• Holding investments
• Protecting assets
• Managing assets within a Will

Benefits of Trusts

The use of Trusts are common within our client base due to the many benefits they offer. These can include:

• Asset Protection through the separation of business assets, investments and personal assets
• Avoiding unnecessary transfer costs and tax consequences when transferring wealth from one generation to the next
• Their flexibility in distributing income, allowing family groups to balance their income
• The ability and flexibility to distribute capital gains made by a Trust to the beneficiaries

You should regularly review your situation and gain advice regarding your current structure to evaluate if a Trust structure is the best option for you, your business and your family.

Trust Distributions

The dynamic nature of family relationships can make managing distributions within a Family Trust complex. Cashing out distributions to beneficiaries is one measure that demonstrates the beneficiary has received the entitlement of the distribution.

It is important to note the ramifications of making a distribution from a Discretionary Trust. A distribution does create an entitlement between the Trust and the beneficiary and although some families reinvest the Trust’s income back into the business and allow beneficiary balances to grow, this does give the beneficiary an entitlement to call on the loan as needed. In this situation, the trust may wish to review and cash out the 30 June beneficiary balance of the prior year each year. We can assist with quantifying this amount.

The benefits of a cashed out distribution are twofold:

1. Directing funds from the Family Trust bank account to the beneficiary provides a transparent way of showing the beneficiary has received the legal entitlement to the distribution; and
2. A cash distribution is a clear demonstration of a present entitlement to the funds, reinforcing the validity of the distribution for tax purposes.

The cashing out process does have clear tax advantages, and the flow of business funds can be managed after the tax cycle through business planning. Although you may feel discomfort discussing distributions and your family dynamics, it does solidify the Trust structure for tax purposes and ensures beneficiary loan balances do not build up substantially.

End of Financial Year Considerations

Beneficiaries

The ease to nominate and change the beneficiaries of a Trust are one of the many attractive elements of establishing a Trust in the first place. However, consideration should be given to their eligibility as a beneficiary, based on the deed and Family Trust elections and what impacts the Trust distributions may have on a beneficiary’s tax position. It would be highly valuable to talk with us or a trusted accountant about using the most efficient distribution structure.

• Adding new beneficiaries
  As a Trustee, you have an obligation to report any new beneficiaries for your Trust to the ATO. As part of tax planning, BLG assists with a review all beneficiaries for your Trust and ensures necessary reporting is compliant and submitted. Any new beneficiaries’ TFN will need to be submitted to the ATO prior to 31st July. Be sure to let us know if any of your Trust beneficiaries are not Australian residents.

• Low income tax offset and minors reminder
  The low income offset is not available to minors who only receive ‘unearned’ income (e.g. distributions from a discretionary trust). Minors can typically only receive $416 of unearned income prior to being taxed at a high rate.

• Streaming of franked dividends and capital gains
  Trustees are only able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the Trust deed allows for streaming to occur and if the minute has been correctly documented prior to 30 June. There are other requirements that need to be in place to ensure the franking credits attached to a franked distribution are able to flow out to the beneficiary, however our team will assist with this when preparing the Income Tax Return of the Trust.

If valid resolutions are not in place by 30 June, the risk is that the taxable income of the Trust will be assessed in the hands of a default beneficiary (if the Trust deed provides for this) or to the Trustee (in which case, the highest marginal rate of tax would normally apply currently being 47%).

There are numerous factors to take into account when dealing with Trusts, and seeking advice from an accountant or business advisor is crucial before making any restructuring decisions. If you find yourself without an advisor, engaging in a conversation with our team at BLG could prove to be immensely beneficial for you. Reach out to our team today and discover if our tailored approach aligns with your requirements.

We wish you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*