Estate Planning and Family Trusts – what are the issues?
What even is a family trust? When people talk about a family trust they are generally talking about a discretionary trust; a discretionary trust is a trust where the trustee has discretion over (they can choose what to do with) some or all of the income and assets of the trust. Really this type of trust is better called a discretionary trust or non-fixed trust as the rights to the income and assets of the trust are not fixed.
The words “family trust” relates to making a family trust election with the Australian Tax Office which is a taxation concept which is a topic for a different article.
If you are the trustee of your family trust or director of the trustee company then you could replace yourself on death by leaving a point in your will that XYZ is the new trustee. I have seen this done and also often recommended by accountants to clients when setting up their new family trust and while this may be possible it is often not.
Replacing a trustee is often controlled by a person called an appointor so irrespective of your wishes (as set out in your will) if your trust has an appointer then that appointor can appoint whoever they want as trustee. In the event the appointor is not available or your trust does not have an appointor then your trust deed may set out steps that need to be taken to replace the trustee – these will need to be followed.
I have also heard from clients that “put your assets in a family trust, then they can be passed on to your heirs and their heirs without paying any tax on death” There are a couple of points that I think are important to look at with this
- Rule against perpetuities – the laws within Australia prohibit perpetuities – in other words a family trust cannot exist indefinitely, typically the lifespan of a trust is limited to 80 years.
- On death you will generally pay capital gains tax (CGT) on any assets sold as part of the administration of your estate but you do not need to sell your assets on death and there are a couple of ways to avoid paying this CGT.
You can transfer Assets directly to your heirs in this case the asset keeps the original cost price from when you bought it and your heir can keep the asset indefinitely and even leave the asset to their heirs paying no tax at the time of your death. (but paying tax if and when they sell)
On death another option would be to create a testamentary trust for example by saying “I leave my rental property on trust with the rent to be enjoyed by my son and the house to be left to my grandchildren do do as they wish when my Son dies” there are a lot of potential benefits to using a testamentary trust including tax benefits and other benefits but their use and what terms you include depend on your situation.
This article is quite general buy hopefully you can see that trusts can be quite complex when it comes to your Estate plan; your Will and other plans. Please consider consulting a professional who has experience working with trusts when planning what will happen with your Estate. You can contact us here.