The main types of family trusts in Australia include discretionary trusts, unit trusts, hybrid trusts, and testamentary trusts. Each has distinct legal features, tax implications, and asset management rules, making it essential to choose the right structure for asset protection, income distribution, and estate planning.
Discretionary Family Trusts
The discretionary trust is the most widely used family trust structure in Australia. It grants trustees discretion in determining how income and capital are distributed among beneficiaries each year.
- Legal Characterisation: Beneficiaries do not hold a fixed entitlement but rather a “mere expectancy.” The trustee’s discretion, exercised under the trust deed, governs distributions.
- Tax Planning Benefits: Trustees can allocate income across beneficiaries to achieve tax efficiency, provided they comply with the Australian Taxation Office (ATO) requirements for timely resolutions.
- Asset Protection: Because beneficiaries have no guaranteed entitlement, trust assets are generally shielded from claims by individual creditors, subject to clawback provisions in insolvency or family law.
Unit Trusts (Fixed Trusts)
A unit trust, often used in commercial or investment contexts, allocates entitlements based on units held by beneficiaries.
- Fixed Rights: Each unit confers a legally enforceable interest in income and capital.
- Investor Certainty: This makes unit trusts more suitable where unrelated parties contribute capital and require predictable entitlements.
- Limitations: Unlike discretionary trusts, trustees cannot redirect income for tax minimisation beyond the unit structure, reducing flexibility but strengthening enforceability.
Hybrid Family Trusts
A hybrid trust incorporates elements of both discretionary and unit trusts.
- Legal Structure: Certain beneficiaries hold units with fixed entitlements, while others benefit from discretionary distributions.
- Strategic Use Cases: Hybrid trusts are often used by families operating businesses where capital contributions need recognition, but income distribution flexibility is still desirable.
- Complexity: These structures require meticulous drafting to avoid ambiguity and potential ATO challenges regarding income characterisation and deductibility.
Testamentary Trusts
A testamentary trust arises under a valid will and takes effect on the testator’s death.
- Estate Planning Function: Testamentary trusts allow estate assets to be managed and distributed under trustee discretion for the long term.
- Tax Treatment: Distributions to minor beneficiaries are taxed at adult rates, a significant advantage over standard inter vivos trusts.
- Protection Against Claims: Properly structured, testamentary trusts can protect assets from creditors or family law disputes affecting beneficiaries.
Special Purpose Family Trusts
Certain specialised trust structures exist for particular legal or financial objectives:
- Special Disability Trusts: Governed by federal law, these provide for the long-term care of family members with severe disabilities, subject to strict eligibility and expenditure rules.
- Fixed vs Discretionary Variants: Families may choose between certainty of entitlement (fixed) and trustee flexibility (discretionary) depending on their risk profile and tax planning needs.
Tax Advantages and Compliance Obligations
Tax efficiency is a primary motivation for establishing family trusts in Australia. However, the benefits are subject to compliance:
- Income Splitting: Trustees can distribute income to beneficiaries in lower tax brackets, but distributions must be documented in accordance with ATO deadlines.
- CGT and Streaming: Capital gains and franked dividends may be streamed to specific beneficiaries, provided the trust deed permits.
- Compliance Burden: Trustees must prepare accounts, lodge tax returns, and act in accordance with fiduciary duties, including the duty to act in good faith and avoid conflicts of interest.
Costs and Administrative Duties
Establishing a family trust involves:
- Setup Costs: Drafting a deed, obtaining professional advice, and paying state-based duties where applicable.
- Ongoing Costs: Annual accounting, audit (if required), and trustee resolutions.
- Trustee Duties: Trustees carry fiduciary obligations to act in the best interests of all beneficiaries, comply with the trust deed, and adhere to statutory obligations under trust law and tax law.
Trusteeship in Australia
A trustee may be either an individual or a corporate entity. Many families elect for a corporate trustee because:
- Continuity: The trust continues regardless of changes in family circumstances.
- Liability Protection: Company structures provide an additional layer of protection, as liability is generally limited to company assets.
- Governance: Corporate trustees ensure clearer separation between family members and trust property, strengthening compliance with fiduciary principles.
FAQs About Types of Family Trusts in Australia
Common questions often arise when families and businesses consider which trust structure suits their needs. The following FAQs address the most frequently asked queries, providing clear legal context and practical insights for decision-makers.
What are the advantages of a family trust in Australia?
Family trusts offer income-splitting opportunities, asset protection from creditors, and estate planning benefits. Proper structuring can also reduce tax burdens while ensuring long-term asset preservation.
What are the disadvantages of a family trust?
Disadvantages include setup and ongoing compliance costs, restrictions on loss distribution, and potential disputes among beneficiaries if trustee discretion is challenged. In complex family arrangements, disputes may also extend to related legal issues such as finding a good family lawyer to resolve conflicts or protect beneficiary interests.
How much does it cost to set up a family trust?
Costs vary but typically range between $1,500–$3,000 for establishment. Annual compliance and accounting obligations add further ongoing expenses.
What is the difference between discretionary and unit trusts?
Discretionary trusts provide flexibility for tax planning but less certainty for beneficiaries, while unit trusts offer fixed entitlements that are legally enforceable, making them more suitable for joint investments.
Conclusion: Selecting the Right Trust Structure
The choice between different types of family trusts in Australia depends on the family’s objectives, tax profile, and succession planning needs. While discretionary trusts remain the most common, unit, hybrid, and testamentary trusts each serve critical roles in asset protection and wealth transfer. Professional legal advice from LegalFinda is essential to ensure compliance with trust law and to structure the trust in a way that achieves both immediate tax efficiency and long-term estate planning goals.
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