In Australian estate planning, family trusts serve as essential legal structures for safeguarding wealth, distributing income, and planning for future generations. A trust is not an entity in itself but a legal relationship where a trustee holds assets for the benefit of others (the beneficiaries) under the terms of a trust deed.
This article explores the different types of family trusts used in Australia, each with specific legal features, taxation frameworks, and suitability depending on individual or family objectives. Whether you are protecting family wealth, managing intergenerational transfers, or optimising tax outcomes, choosing the right trust structure is a strategic legal decision.
Discretionary (Family) Trusts
Under Australian law, a discretionary trust—commonly referred to as a family trust—grants the trustee broad discretion to determine how income and capital are distributed among a defined class of beneficiaries. While this is the most flexible structure, a common type is the property trust, which families often use to hold real estate and distribute rental income strategically.
- Legal Features: The trust deed grants the trustee powers to decide who benefits and to what extent. This flexibility supports responsive financial planning and asset control.
- Use Cases: Widely used by family businesses, professional families, and investors to enable income streaming, asset protection, and tax efficiency.
- Tax Treatment: Income is taxed in the hands of beneficiaries, allowing trustees to allocate income to lower-rate individuals. Family Trust Elections (FTEs) may be made to secure franking credit benefits and loss recoupment rules.
- Compliance Considerations: Trustees must comply with the deed’s terms, trust law fiduciary duties, and the Trustee Act 1925 (NSW) or equivalent state legislation.
Unit (Fixed) Trusts
A unit trust operates similarly to a company with shareholders, but within a trust framework. Beneficiaries hold defined “units” that entitle them to a proportionate share of income and assets.
- Legal Features: Legal ownership is held by the trustee, but beneficial ownership is proportionately fixed by unit holdings. Transfer of units is possible, subject to the trust deed.
- Use Cases: Common in property syndicates, joint ventures, or when family members contribute capital unequally and require fixed returns.
- Tax Treatment: Distributions are determined by unit ownership. Beneficiaries are assessed on their share under Division 6 of the Income Tax Assessment Act 1936.
- Legal Implications: Offers certainty but less flexibility. Trust deeds must clearly outline unit rights, capital distributions, and redemption provisions.
Hybrid Trusts
Hybrid trusts combine discretionary and unit trust elements, offering both fixed and discretionary interests. They are less common but can be tailored for complex arrangements. For context, another example is the income trust, which focuses on distributing income streams to beneficiaries while maintaining control over the underlying assets.
- Legal Features: Beneficiaries may hold fixed income rights via units, while the trustee retains discretion over remaining capital or income allocations.
- Use Cases: Suits complex family or business arrangements where some stakeholders require certainty, and others benefit from flexibility.
- Tax Treatment: Complex; often subject to increased ATO scrutiny. Income distributed according to unit holdings may be treated differently from discretionary allocations.
- Legal Caveat: Hybrid trusts must be carefully drafted and professionally administered to avoid tax and compliance issues.
Testamentary Trusts
A testamentary trust is established under a valid will and takes effect upon the death of the testator.
- Legal Features: Created by a will, not during the testator’s lifetime. The trustee administers estate assets according to the will’s terms.
- Use Cases: Offers asset protection for minor children, vulnerable beneficiaries, or where blended family dynamics require structured inheritance control.
- Tax Treatment: Unique benefit: minor beneficiaries (under 18) are taxed at adult rates on income distributed from a testamentary trust (per Income Tax Assessment Act 1997, s102AG).
- Legal Benefit: Offers court-tested asset protection, with trustee discretion over income and capital.
Special Disability Trusts (SDTs)
Special Disability Trusts are legislatively recognised structures aimed at securing the long-term welfare of people with severe disabilities.
- Legal Features: Must comply with the Social Security Act 1991 (Cth). Strict eligibility and reporting requirements apply.
- Use Cases: Designed to provide for the reasonable care and accommodation needs of a family member with a severe disability without affecting their Centrelink entitlements.
- Tax Treatment: Income may be concessional depending on investment returns and approved expenses.
- Compliance Note: Requires Centrelink registration, annual audits, and formal medical certification.
Less Common Trust Types
While not used as frequently in family structures, the following trusts may be relevant in specialised cases:
- Bare Trusts: Trustee holds property absolutely for a beneficiary who has immediate rights. Often used in SMSF property investments or minor beneficiary arrangements.
- Charitable Trusts: Established to benefit public charitable purposes; may be used in legacy planning.
- Superannuation Trusts: Governed by the Superannuation Industry (Supervision) Act 1993 (Cth). Self-managed super funds (SMSFs) technically operate under trust law but with additional statutory obligations.
FAQs: Understanding Family Trust Types in Australia
A range of nuanced questions arises when deciding between family trust structures. Here are answers to the most relevant based on user queries:
What is the best family trust structure for asset protection?
A discretionary trust is often preferred, as the trustee—not individual beneficiaries—owns the trust assets. This can shield them from personal liabilities, subject to clawback rules in insolvency or family law disputes.
Can a family trust protect assets from creditors?
Yes, within limits. Assets held in a discretionary trust may be protected from creditor claims against a beneficiary, as the beneficiary has no fixed entitlement until a distribution is made.
What is the key legal difference between unit and discretionary trusts?
In a unit trust, beneficiaries have enforceable proprietary rights tied to their units. In a discretionary trust, beneficiaries have only a mere expectancy until the trustee exercises discretion.
Are hybrid trusts legal in Australia?
Yes, but they are complex and frequently scrutinised by the ATO. They require legal advice during establishment and ongoing compliance with trust law and taxation provisions.
Can I use multiple trusts for different purposes?
Yes. Many high-net-worth families use a combination of trusts (e.g., one for investments, one for children, one testamentary trust) to align with legal, tax, and succession goals.
Conclusion
Understanding the different types of family trusts under Australian law is essential for making informed decisions about wealth protection, tax planning, and succession. Each trust—be it discretionary, unit, hybrid, testamentary, or a special disability trust—has unique legal obligations and strategic advantages.
Before selecting a structure, consult with a legal or tax professional to ensure the trust is aligned with your objectives and compliant with Australian legislation. If you are unsure of how to find a good family law lawyer, LegalFinda.com.au connects individuals and families with experienced trust lawyers and estate planning professionals across Australia.
