Family Trust Training Course
Welcome to Legal Consolidated’s Estate Planning training course.
The course is for accountants, financial planners and lawyers.
Welcome to Legal Consolidated’s Family Trust training course. The course is for accountants, financial planners and lawyers.
I am an adjunct Professor, holding seven university degrees including a doctorate in Estate & Succession Planning. Since 1988, I have specialised, as a lawyer in Estate Planning, Superannuation and taxation.
I am pleased to offer a certificate of accreditation from Legal Consolidated. This is on completion of the online Estate Planning training Course.
- Click on the blue button and watch the training video
- After you watch the video you will be invited to build 3-Generation Testamentary Trust Mutual Wills
- Lock and Build to purchase the Mutual Wills and get your Completion Certificate
The Family Trust Training Course explains:
- How is succession planning achieved in a Family Trust?
- Why do we need a Settlor?
- Appointor vs Trustee – which one is god? Which one is a puppet?
- The new Streaming rules after Thomas v FCT 
- The new ATO approach to Bamford’s Case
- Why should Appointors be forced to act unanimously
- Why banks won’t lend to a Family Trust unless the Deed contains certain wording
- What does a Bank loan Compliance Certificate on our law firm’s letterhead look like
- A full sample of a Family Trust Deed
The Family Trust training course empowers you to build Family Trust deeds on our law firm’s website, for your clients. You provide the financial planning and accounting advice and charge your clients for that advice. You can be confident and secure in the knowledge that we, and we alone, are providing the legal advice.
There is a misunderstanding in society that ‘trusts’ are just for rich people. They are often associated with blue blood families and powerful moguls. However, trusts are effective for anyone running a business, building wealth and protecting assets. There are over 800,000 Australian family trusts.
Family Trusts reduce the overall tax rate between family members, protect assets from creditors and provide succession planning. They are useful in wealth creation and retention.
These are the benefits of a Family Trust:
1. Family Trust protects assets and saves tax
A trustee holds assets in its own name. But it holds the assets for the benefit of someone else. That someone else is called a beneficiary. A Family Trust is a popular vehicle set up by accountants and financial planners. It is great for both wealth creation and asset protection:
1. each year pay trust income to family members on low marginal tax rates
2. protect assets from creditors (asset protection)
3. succession planning – no CGT or stamp duty when you die
4. the trust can loan money to family members to buy investments – delivering tax breaks
5. invest in insurance bonds to access lower aged care fees
6. hold shares in a company
7. hold units in a unit trust.
Legal Consolidated is a specialist trust law firm. Our Family Trust is cutting edge allowing your accountant and adviser to seek all tax savings.
A family trust and discretionary trust are the same thing. They are just different words for the same document.
2. Payless tax – hunt down family members on low marginal tax rates
All trusts have a trustee and a beneficiary. A Family Trust also has an Appointor. An Appointor is god. It bosses the trustee around. The Appointor is usually mum and dad. The Trustee is often their company. The Appointor tells the Trustee who gets the trust income each year.
For example, Mum earns a lot of money through her work. She pays a high tax rate. In contrast, stay at home Dad earns no income. Also, the children at university earn only a little income from part-time jobs. The Discretionary Trust distributes the trust income to these beneficiaries on low incomes. The tax rate is as low as zero. Next year one of the children finishes at university and gets a job. They now pay a high marginal tax rate. Not a problem. The Discretionary Trust does not now distribute to them. Every year you hunt down family members on low marginal tax rates.
Family Trust beneficiaries include mum and dad, their company, adult children, children’s spouses, grandchildren and their spouses. It includes your parents and distant relatives.
How does ‘income splitting’ work?
An Australian discretionary trust minimises a family’s total tax bill.
The family trust itself doesn’t pay tax. Instead, it distributes the income to beneficiaries: humans and sometimes a company. (‘Bucket’ companies are rarely used because of Division 7A.). These beneficiaries pay tax on the trust distribution (income) at their personal tax rate.
Australians pay tax at marginal rates. The greater your income the higher rate of tax you pay. Obviously, you distribute income to the lower-income earners. They pay no tax or a lower percentage of tax. Thus, you even out the overall taxable incomes.
- The high-income individual directs business and investment earnings into the family trust. (These cannot be wage and salary earnings.)
- The trust then has to allocate all that income.
- The family discretionary trust makes payments to beneficiaries on the lowest incomes. Those beneficiaries pay the least tax.
Every year the Appointor directs the Trustee to pay out all the trust income to the beneficiaries. Your choice of beneficiaries can change each financial year. For example, last year you distributed to your retired parents. This year you distribute to your child who just turned 18 years of age and is not working.
You make multiple use of the tax-free threshold and lower tax rates enjoyed by family members on low incomes. During the 80-year life (unlimited in SA) of the Family Trust, each year you pick and choose beneficiaries on low tax rates.
Therefore, the effectiveness of a discretionary trust depends on the availability of beneficiaries.
Children under 18 are not much use
Your income from a Family Trust each year is called a ‘distribution’. This is ‘unearned’ income. You can only distribute up to $416 each financial year to a minor. (The tax rate for a minor then climbs to 66%!) This is because of the draconian effect of Division 6AA ITTA 1936. However, section 102AG ITAA 1936 gives an exemption to minors (someone under 18 years of age):
- Minors in 3-Generation Testamentary Trust Wills get an adult tax rate threshold – they are treated as though they are adults (but you have to die to get the Will to operate – which is the absolute sacrifice to tax minimisation!)
- Disabled children (e.g. on a disability support pension) also get an adult tax rate threshold.
There are, however, often other family members aged over 18 who are on low marginal tax rates. These beneficiaries receive trust income. They include adult children who are studying or a low-income-earning spouse.
Also, think of the future. If your child is 12 now, then you have a while to wait. But in the meantime, your spouse might stop working.
3. Reduce land tax
Own more than one property in the same State? The more property in one person’s name the higher the marginal land tax rate. Instead, hold each property in a separate Family Trust with a different Trustee. You, therefore, get the tax-free threshold for each property. Secondly, you pay a lower marginal tax rate for each property.
4. Challenges to your Will
Only a spouse or defacto can challenge your Family Trust. Children cannot challenge a Family Trust. Family Trusts quarantine assets from challenges to Wills.
A Will and anything that forms part of an estate can be contested. In contrast, a family trust is a separate entity. The assets within the trust are protected from family members and children that could otherwise challenge a Will. However, because of ‘notional’ estates in NSW, it is harder, but not impossible to protect the family trust assets in NSW after the death of the appointor.
5. Superannuation vs Family Trust
Unlike a superannuation fund, holding assets within a trust doesn’t necessarily lock them away for years. If you are young and need flexibility then a family trust is often used to hold assets outside superannuation. Often your accountant and adviser interchanges the family trust and super as part of the overall wealth creation strategy. Depending on your age, they maximise the super contribution levels first and then use surplus funds for the trust. If a client isn’t maximising super contributions, often they shift assets from the trust into super.
6. Asset Protection
Family Trusts protect a business owner’s personal assets from their business assets. This is if their business goes down the gurgler. The common strategy is to build a company as a corporate trustee of a family trust. This is how to do it: /company-as-trustee-of-family-trust/
Family Trust vs other types of trusts
a. Company vs Family Trust – CGT concessions trapped in a company
Discretionary Trusts often hold appreciating assets such as shares or land. CGT relief flows through to the beneficiary. Capital gains are taxed at concessional rates. In contrast, when you dispose of an asset out of your company the CGT concessions are lost. You can’t get them out of a company.
Also, when a trust makes a capital gain, 50% of the amount is tax-free. This is provided that the asset is held in the trust for over 12 months.
b. Last Will & Testament vs Discretionary Trust – you can’t challenge a Discretionary Trust
Your children’s divorce, spendthrift children and conniving children-in-law can’t touch the assets in your Family Trust. The only person that can attack your Family Trust is your spouse. In contrast, many people including parents, children and grandchildren can challenge your Will. Except for NSW, the Discretionary Trust quarantines assets from your Will.
A Will and your estate are contestable. However, a Family Trust is a separate entity to you. Trust assets are harder to attack.
c. Superannuation vs Discretionary Trust – super traps your money
Superannuation is a wonderful tax haven. The tax rate, going in, is 15%. But the money is locked away until you retire. Unlike a superannuation fund, your assets in a Family Discretionary Trust are not locked away. Also, potentially, you can get the tax rate down below 15%, even to zero. This is if you have beneficiaries on low incomes.
Often your accountant and financial planner maximise your super contribution levels first. They then put surplus funds into the Family Trust.
Company or a Human? Which one is best as the trustee of my Family Trust?
Your family trust must have a trustee. The trustee is a human or a company. Which one is best? This question is about asset protection. If the Family Trust goes insolvent then the trustee of the Family Trust often goes down with the Family Trust. If your Family Trust is just going to hold passive safe assets like shares then there is not much value in having a company as the trustee of your Family Trust. But if your Family Trust is going to hold business assets then building a company and making it the trustee of your family trust is worth the extra cost. You can build a company here.
Why use the expression ‘discretionary’ trust?
A discretionary trust is often called a Family Trust or Family Discretionary Trust. It means the same thing. It gives the Trustee (acting under the Appointor) huge discretion on who gets the trust income each year.
Each financial year the Appointor tells the Trustee which beneficiaries are to get that trust income.
Until the Trustee exercises its discretion, the beneficiaries have no interest in the trust property. This means that your children have little power to try to get money out of the trust.
Every year the Trustee decides who gets trust income. The Trustee hunts down beneficiaries on low tax rates and uses those low tax rates to pay less tax. The beneficiaries rarely see any money out of the trust. Each year they merely forgive the debt by signing a Debt Forgiveness Agreement.
Trustee vs Appointor – which one is god?
There is only one power in a Family Discretionary Trust. That person is the Appointor.
The Settlor primes the trust with a few dollars. The Settlor is heard of no more.
The Trustee is merely the Appointor’s puppet.
The beneficiaries get nothing out of the trust. This is unless the Appointor tells the Trustee something different. The Default Beneficiaries only get something if the Appointor forgets to tell the Trustee to distribute income and capital. (This almost never happens.)
Trustee vs Appointor
Who is in charge? Is it the Trustee that ‘owns’ the assets? No, the Appointor is god. The Appointor bosses the Trustee. The Trustee looks like it is in control, as it has the assets in its name. However, the Trustee takes it marching orders from the Appointor. The Appointor can sack the Trustee on a whim, for no reason at all. For example, the Trustee has nothing to do with this Deed of Variation. The variation relates to the Appointors only. The Trustee is not even party to the Deed of Variation.
Can the Appointor be BOTH mum and dad?
Yes, commonly mum and dad are each an Appointor together. You can have as many Appointors as you wish.
You can also have as many Back-up Appointors as you wish. The Backup Appointors are generally your children: ‘the union of Dad Full Name and Mum Full Name’.
Can the appointor be a company?
It is becoming more common to set up a company as a dedicated Appointor of a family trust. So, for example, mum and dad are Appointors, in the first instance. The company is the Back-up Appointor. You and your spouse own the shares in the company. (Obviously, the shareholders have ultimate control of the company, not the directors.) When you and your spouse die (i.e. once the Appointors die) your children inherit the shares in the Appointor company. Your children, get everything equally in your Will and therefore control the family trust via the control of the shares in the Appointor company. (This is an exemption to the rule that a Will should not control the family trust.) Commonly you would also have a Shareholders Agreement to lock in the rules. If the beneficiaries getting the shares are minors then the executor(s) in mum and dad’s Wills control the shares (and therefore the assets in the Family Trust). They can only act in the best interests of the minor children. (Whether you have a 3-Generation Trust Will the position is the same.)
Advantages in building a Legal Consolidated Family Trust Deed
Our lawyers are elite taxation and trust lawyers. We hold professorships and doctorates in these areas. We ensure:
1. Streaming – franking credits, attribution and separate accounts to reduce CGT & income tax, complies with Thomas v FCT  FCAFC 57
2. Bamford’s Case – definition of Net Income – satisfies ATO
3. Loss Recoupment – retain and stream losses to particular beneficiaries
4. Appointors to act unanimously – so two Appointors can’t take the assets over the 3rd Appointor
5. Bank loans to the Discretionary Trust – the required bank clauses and Indemnity rights (CBA, NAB, ANZ & Westpac)
6. Bank loan Compliance Certificate signed on our law firm’s letterhead
What do I get?
Within seconds of building the Discretionary Trust Deed online you get via email:
1. The law firm’s covering letter – confirming our law firm authored the family trust.
2. Trust Opinion Certificate on our law firm’s letterhead, signed by one of our lawyers.
3. Family Discretionary Trust Deed setting out the rules of your trust, naming the Trustees and Appointors.
4. Minutes to set up the Trust, as required by your accountant and the ATO.
What else do I need?
1. Stamp duty. Only 4 jurisdictions still charge duty: NSW and Victoria charge $200. Tasmania charges $50. NT charges $20. There is no duty in SA, WA, QLD and ACT.
2. ABN. If you are trading (rather than just holding passive income) the trust may apply for an Australian Business Number (ABN) from the Australian Tax Office. You may also apply at the same time for a Tax File Number and for GST. These are all free.
Why build the Family Trust with the specialist taxation law firm, Legal Consolidated Barristers and Solicitors?
We are the only law firm in Australia providing legal documents online. Our law firm addresses:
1. The Streaming Provisions
Since November 1992, the ATO has issued rulings for the “streaming” of income. “Streaming” reduces capital and income tax. For example, you may wish to:
- stream a franked dividend only to the beneficiary George
- distribute capital losses to another beneficiary, Mary
- stream income to a separate group of beneficiaries being John’s children
For this to happen your Trust Deed, according to the ATO, must expressly allow those specific categories: ‘franked dividends’, ‘capital losses’ and income. This is so that each category retains its individual status when it enters and then leaves the trust. Unless you have streaming everything coming into the trust merges with everything else. It is like when your child mixes the plasticine colours – it all ends up grey. Each type of income loses its individual character.
If there was no streaming in the above example, then a bit of the franked dividend, capital losses and income has to go to George. George doesn’t want and can’t use the capital losses – so it is wasted on him. Also, more income to George is a disaster because he is already suffering the highest marginal tax rate. George only wanted the franked dividend, but that category of income merge with everything else.
The ATO states that ‘the Trustee must be validly empowered to selectively allocate each category of income’. That is, the Trust Deed itself must contain the ability to stream income. Most old Family Trust Deeds, including many brand new Family Trusts, fail to adequately deal with the full list of categories. Without proper streaming in your trust deed, the categories of income merge and can’t be untangled. The old Family Trust Deed must be updated first.
Here is one example:
Your old Family Trust sells a rental property and realises a capital gain. This capital gain is received into the Trust. It is part of the Trust’s net income. Correctly drafted, streaming provisions allow the capital gain to be distributed to one particular beneficiary. Another category received by the trust was franked dividends. They are also part of the Trust’s income. However, because of streaming the dividends don’t merge with the other categories of income, such as the capital gain. The dividends are not “mixed” with the capital gains tax income. The dividends can be distributed to another beneficiary.
Why does it matter which beneficiary gets different types of income?
Your accountant may suggest that the dividend (or foreign tax credit) be utilised by a resident individual beneficiary with high marginal tax rates. In contrast, net capital gains is best utilised by another beneficiary with carry forward capital losses, low-income beneficiaries with carry-forward revenue losses and minor beneficiaries able to receive excepted Trust income.
Because of the marginal tax rates and myriad of rules, every taxpayer is unique and benefits from one type of income, rather than another type.
In effect your streaming allows you to distribute one type of income to one beneficiary and another type of income to a different beneficiary.
List of necessary categories
These are the necessary categories that we put in your Family Trust Deed.
Categories a category, character, type, class, part, item or source, including (but not limited to) the categories:
- Net Capital Gains
- Net Capital Losses
- losses of capital
- capital profit treated as assessable income
- allowable deductions under the ITAA
- Tax Act for the Trust Income for any Financial Year; gains and profits or any losses of capital or of a capital nature that are not treated as assessable income or allowable deductions for taxation purposes for the Trust Income for any Financial Year; any income, receipts, gains or profits or any losses, disbursements or outgoings of income or on income account that are or are treated as assessable income or allowable deductions for taxation purposes in relation to the Trust Income for any Financial Year; any income, receipts, gains or profits or any losses, disbursements or outgoings of income or on income account whether treated as assessable income or allowable deductions for taxation purposes for any Financial Year; any income, receipts, gains or profits that are exempt or otherwise not liable to tax under the Tax Act or any other act or regulation;
- Franked Dividends;
- Unfranked Dividends
- foreign income
- foreign income tax credit
- other tax credit
- minors who has died
- proceeds from deceased estates
- superannuation funds
- life insurance
- additional categories set out in any minutes
- categories mentioned in any Australian Taxation Office publication, from time to time
What categories are required?
Have a look at our ‘Sample document’ above. We have developed a unique group of categories with open classes for streaming. This list is based on the ATO audits we have attended and our legal research.
* Plus, categories mentioned in any Australian Taxation Office publication, from time to time; and
* any combination or part of the above
2. Franking Credits
At times your Trust may include gross income from franked dividends. A resident beneficiary in your Family Trust (other than a Trustee of another Trust estate) is entitled to a franking rebate if:
- a share of net Trust income is included in the beneficiaries’ assessable income; and
- some or that entire share of net Trust income is attributable to a franked dividend included in the assessable income of the Trust estate.
Notwithstanding wide discretionary powers being conferred on a Trustee, a Trustee’s discretion to selectively allocate dividend income to a beneficiary to the exclusion of another may be fettered by the terms of the Trust or by Trust law operative in the relevant jurisdiction. You don’t want that. Therefore, we have inserted a clause in your Trust Deed which expressly empowers you to selectively allocate particular types of income to beneficiaries.
Your accountant may suggest that you distribute that part of the net income to those beneficiaries who are able to take the greatest advantage of franking, foreign tax and any other non-refundable tax credits and rebates available to the Trust. Those beneficiaries who have made a loss or are at a low tax rate (especially if lower than the company tax rate) may derive little benefit from these credits.
3. Attribution to distribute capital gain to beneficiaries
When the Trust derives net capital gain in the net income of the Trust, then the Trustee needs the power to distribute that part of the net income to certain beneficiaries. The beneficiaries are treated by the Commissioner of Taxation as having accrued a capital gain. It may be that one beneficiary has carried forward capital losses and another has carried-forward revenue losses. In this case, there are tax advantages in distributing the net capital gain to the beneficiary who has suffered the prior capital losses.
For some old Family Trusts, the Commissioner may take the view that either:
- both beneficiaries are treated as having been presently entitled to a proportionate amount of the net capital gain and other net Trust income; or
- the net capital gain loses its character and therefore no part of the Trust distribution is characterised as being a net capital gain.
Both outcomes are generally unfavourable. Our Trust Deed allows attribution.
4. Ongoing extension of the Capital Gains Tax regime
Your Deed of Variation allows you to account separately and keep separate any funds received from different sources. Your Trust Deed is amended to allow the Trustee to account separately and keep separate any funds received from different sources. For example, sources may include:
- capital gains
- any dividend income (of all natures)
- income having an allowance for depreciation (inclusive of depreciation of buildings and plant and equipment
- any income from Superannuation investments or annuities
- income from deceased estates and Trusts (including testamentary Trusts) whether trading, investment or otherwise
- franked distributions
- credit trading income
- primary production income
- income from personal exertion
- rents and other property income
- foreign source income
5. Definition of Net Income
A Trust distribution often allows you to pay less tax. You normally distribute to the family members that are on the lowest tax rates. If you fail to distribute, then the Trustee (as the taxpayer) pays the tax at the highest marginal tax rate.
You distribute Trust income to the pool of potential beneficiaries. If you don’t distribute any part of the Trust income, then the Trustee is assessed on that part of the ‘net income’ at the highest marginal tax rate.
As the court in Bamford v Commissioner of Taxation  FCAFC 66 said:
the only purpose of the concept of “income of the Trust estate” in section 97(1) is to determine the extent of the apportionment as between the beneficiaries and the Trustee. It is not, in itself, a metric by which tax is imposed.
There is a difference between ‘Trust income’ within the taxation legislation. Net income of the Trust estate is the taxable income of the Trust. A beneficiary is entitled to the Trust income. But they are taxed, instead, on the net income.
Your Family Trust deed allows you to:
- define Trust income appropriately; and
- make valid distributions.
6. Loss Recoupment
The Trustee has the power to determine not to recoup carried forward losses, to have distributable income, which can be applied to various beneficiaries. If you did not have that power, there could be a situation arising where there is no income of the Trust estate to distribute. According to the ATO, the Trustee is assessed on the capital gain. To make matters worse a corporate Trustee is taxed on the grossed-up capital gain, without recourse to the tax legislation.
Can the Appointor be BOTH mum and dad? Can the appointor be a company?
Yes, commonly mum and dad are each an Appointor together. You can have as many Appointors as you wish.
You can also have as many Back-up Appointors as you wish. The Backup Appointors are generally your children: ‘the union of Dad Full Name and Mum Full Name’.
It is becoming more common to have a company set up as a dedicated Appointor of a family trust. So instead of mum and dad as Appointors, the company instead is the Appointor. In that case, you and your spouse own the shares in the company. (Obviously, the shareholders have ultimate control of the company, not the directors.) When you die, your children, get everything equally in your Will and therefore control the family trust via the control of the shares in the company. (This is an exemption to the rule that a Will should not control the family trust.) Commonly you would also have a Shareholders Agreement to lock in the rules. If the beneficiaries getting the shares are under age then the executor(s) in mum and dad’s Will control the shares (and therefore the assets in the Family Trust) but only for the minor children’s benefit. (Whether you have a 3-Generation Trust Will the position is the same.)
Can the Appointor and Trustee be the same person?
Yes, ‘god’ (the appointor) and the ‘puppet’ (the trustee) can be one and the same person. It is very common for a person who is not married and does not have children. It does not offend trust law, as niether is a beneficiary. In fact, most Australian trusts have 100,000s of beneficiaries.
If you are married, then from an asset protection point of view, it is better to have ‘low risk of bankruptcy mum’ as Appointor. And make ‘high-risk business owner dad’ the trustee or director of the corporate trustee.
Should a Will, 3-Generation Testamentary Trust or Testamentary Trust ‘control’ my Family Trust?
It is wrong and foolish to allow your Will (or any trusts formed under your Will) to control the succession of your Family Trust. The only way that you should update or direct who is the controller of your family trust is via a Deed of Update. This is the document you are about to start building. Just press the blue-button above to start the process. Read the hints as you build the document.
My children are under 18 years of age, can I still make them backup Appointors?
After the Appointor or Appointors all die (or go bankrupt or lose mental capacity) your Back up Appointors take over. If you have one child and expect more children then commonly the backup Appointors are “Child One Full Name” and “Unborn Children”. But what happens if the Appointors all die and there is only under 18-year-olds as the Back-up Appointors? That is fine. Their position is protected until they turn 18. In the meantime, the minor’s legal personal representative (guardians) hold that position in trust for those minors. However, the Court may direct another person to take charge of the Appointor position. But at all times that person or persons must always act in the children’s best interests. The assets in the Family Trust are protected for the minors.
If my spouse and myself both go bankrupt or lose mental capacity we lose control to our Back-up Appointors. Do we get it back when we come out of bankruptcy or regain mental capacity?
No, you do not get control of the trust back. There are bankruptcy risks to set up the Appointors succession plan in that way. Choose your co-Appointors and Back-up Appointors carefully.