Family Living Trusts in Australia: How They Work?

A family living trust is a powerful estate planning tool that allows Australian families to protect, manage, and distribute assets in a tax-effective and controlled manner. Whether for asset protection, succession planning, or minimising disputes, these trusts serve as a cornerstone in wealth preservation strategies.

This article outlines how family living trusts operate under Australian law, their legal benefits and limitations, and what sets them apart from other trust structures.

What Is a Family Living Trust?

A family living trust is a legal arrangement where a trustee holds and manages assets on behalf of named beneficiaries during the lifetime of the person who establishes the trust (the settlor). It is considered a “living” trust because it is created and takes effect while the settlor is still alive.

In Australia, these trusts are typically discretionary, granting the trustee flexibility in distributing income or capital among family members.

Legal Structure and Key Roles

Every family living trust must be properly constituted under Australian trust law, and include the following elements:

• Settlor: The individual who establishes the trust and transfers assets into it. The settlor typically has no further control or benefit after creation.
• Trustee: The legal owner of the trust assets, responsible for administering the trust in line with the trust deed and fiduciary duties.
• Appointor: Holds the power to remove and appoint trustees, often acting as the ultimate controller of the trust.
• Beneficiaries: Individuals or entities who may receive distributions of income or capital from the trust.

A valid trust deed is critical. It defines the trust’s rules, the classes of beneficiaries, the powers of the trustee, and the duration of the trust (commonly capped at 80 years under the rule against perpetuities unless otherwise allowed by state law).

Revocable vs Irrevocable Living Trusts in Australia

In the Australian context, family living trusts are almost always irrevocable. This means the trust cannot be easily amended or dissolved once created, providing certainty and asset protection.

Revocable Trusts

• Rare in Australia due to potential tax and legal ambiguity.
• Allow the settlor to retain control, but may undermine asset protection.
• May be treated as a “sham” if not structured carefully under Australian jurisprudence.

Irrevocable Trusts

• Common in family estate planning.
• Offer stronger legal protection against creditors or family law claims.
• Reflect a genuine transfer of beneficial ownership to the trustee and beneficiaries.

Why Do Australian Families Use Living Trusts?

Australian families often choose living trusts for a combination of legal and financial reasons:

• Asset Protection: Assets held in a discretionary trust may be shielded from claims by creditors or ex-spouses, provided the trust is structured and operated correctly.
• Tax Planning: Trustees can distribute income to beneficiaries in lower tax brackets, reducing the overall tax liability.
• Succession Control: Trusts allow for intergenerational wealth transfer while retaining control over who receives what and when.
• Avoiding Probate: Trust-held assets do not form part of the deceased estate, potentially reducing probate costs and delays.

Trustee Responsibilities Under Australian Law

Trustees in Australia carry fiduciary obligations under both statute and common law. Key duties include:

• Acting in good faith and in the best interests of all beneficiaries.
• Managing trust property prudently and avoiding conflicts of interest.
• Distributing income in accordance with the trust deed and relevant taxation law.

Trustees can be individuals or a corporate trustee. Appointing a company as trustee is often recommended for asset separation and legal continuity.

Taxation of Family Living Trusts in Australia

The Australian Taxation Office (ATO) treats family living trusts as flow-through entities. This means income is generally taxed in the hands of beneficiaries, not the trust itself, provided distributions are correctly made.

• Undistributed income may attract penalty tax rates.
• Capital gains can be streamed to beneficiaries with capital losses or lower marginal tax rates.
• Franking credits on dividends can also be passed to beneficiaries, subject to holding rules and trust deed provisions.

It is critical to work with a tax advisor to ensure compliance with ATO rulings, particularly regarding Division 6 of the Income Tax Assessment Act 1936.

Choosing the Right Trustee and Appointor

Carefully selecting the trustee and appointor is essential for risk management. Inappropriate choices can lead to disputes, mismanagement, or unintended tax consequences.

• The trustee should be someone (or a company) with financial acumen, impartiality, and a clear understanding of fiduciary obligations.
• The appointor must be trusted completely, as they control the ultimate direction of the trust.

Given the long-term nature of these decisions, families often benefit from professional legal guidance. Knowing the process of finding a good family lawyer ensures that the trust deed, appointments, and succession pathways are structured correctly from the outset.

FAQs: Australian Family Living Trusts

Family living trusts are often surrounded by legal misconceptions and practical questions. This section answers the most common queries Australians have when considering or managing a family living trust — from tax implications to what happens after death.

What happens to a family trust when someone dies?

Assets in a family living trust do not form part of the deceased’s estate. The trustee continues to manage and distribute the assets per the trust deed, ensuring smoother succession and avoiding probate.

Can a family living trust be challenged in court?

Yes. A trust may be challenged if there are claims of undue influence, lack of capacity when the trust was created, or if a family provision claim is made under estate law. However, trusts are generally more difficult to contest than wills.

Are family trusts suitable for small estates?

They can be, especially where asset protection or complex family dynamics exist. However, they involve setup and ongoing administrative costs, so legal advice is needed to assess suitability.

How long can a family trust last?

Most family living trusts in Australia operate under the 80-year rule, unless created in jurisdictions (like South Australia) that allow perpetual trusts. The trust deed specifies the maximum duration.

Final Thoughts: Is a Family Living Trust Right for You?

Establishing a family living trust requires careful legal structuring, tax consideration, and a long-term view. While these trusts offer powerful benefits, they must be set up correctly and managed diligently to withstand legal scrutiny and deliver intended outcomes.

Looking for legal advice on family living trusts in Australia?

LegalFinda connects you with experienced estate planning lawyers who understand the nuances of trust law across Australian jurisdictions. Whether you're setting up a new trust or reviewing an existing one, find the right legal expert today at LegalFinda.