Most people have a general awareness of family trusts as being an investment vehicle for building up wealth, but don’t know much more about them.
In this post I will provide a quick overview of what they are and why they can be useful.
To understand what a family trust is, you also need to know something about what makes up a trust.
Ignoring the legal formalities and technicalities, a trust is created where one person entrusts certain property to another person. The person who holds the property is called the trustee and is responsible for looking after the property.
The property has to be entrusted to the trustee for certain people or a particular purpose. The differences between types of trusts mostly come down to who the beneficiaries are and what the trustee is able to do with the property.
In the case of a family trust, the beneficiaries are the members of a person’s family, future generations, and often both the extended family and other investment vehicles of the family.
The trustee is given a discretion as to who amongst the family group should receive the property and the income from it. But until that happens the property is owned by the trustee, not any individual member of the family.
Because the property is owned by the trust, not the family members themselves, the trust provides a level of protection against individual family members going bankrupt.
The ability of the trustee to choose who receives the income from the property allows the trustee to direct the income in a way that will have the best effect. Who receives the income has major tax implications because some family members will be taxed less. It is for that reason that accountants frequently recommend family trusts.
Family trusts can be used as part of estate planning, because the trust can continue on after the death of those who set it up.
There are downsides too. Aside from establishment costs, there are ongoing accounting costs and many exemptions and concessions for property often don’t apply in the same way. Having property tied up in a trust (which you may or may not have a degree of control over) can often become unwieldy.
Trusts are an extra complication and there are a number of other potential advantages and disadvantages to family trusts that can greatly alter their usefulness for any given person. The laws about trusts also change between locations and over time. Proper legal and financial advice should therefore be obtained when considering whether to have a family trust.