There's a common saying that you should start most endeavours with the end in mind and this is especially true for property investment.
But unfortunately, too many investors begin their journey without considering what might be the best ownership structure and wind up owning their entire portfolio in their personal name.
While this is perfectly alright in many circumstances, there are other options out there that may be better for you and your family.
So, in this article, we're going to get to the bottom of setting up a family trust as well as explore its benefits and risks.
What is an Australian Family Trust?
In the beginning, it can be a little tricky to understand the ins and outs of family trusts so we'll try our best to explain it as simply as possible.
The term family trust refers to a discretionary trust set up to hold a family's assets or to conduct a family business.
Generally, they are established for asset protection or tax purposes.
What does it cost to set up?
Like any type of legal documentation, setting up a family trust does cost money.
In fact, the initial start-up cost can be about $2,500 and then the same amount again annually in maintenance-type fees.
These types of ongoing costs are necessary because there are significant rules and regulations around family trusts, including meeting the requirements for asset protection and all the Australian Taxation Office registrations on ABN as well as Tax File Numbers.
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Family trusts can also attract stamp duty with the cost varying from State to State:
- WA – Nil
- ACT – Nil
- NSW – $500 (due 3 months of the date of the deed)
- NT – $20 (60 days of the date of deed)
- QLD – Nil
- SA – Nil
- TAS – $20 (due 3 months of the date of the deed)
- VIC – $200 (due 30 days of the date of the deed)
What are the benefits of a family trust?
Family trusts offer a variety of benefits, that's why plenty of people choose to set one up.
Some of the benefits of setting up a family trust include:
- Asset protection – such as the ability to buy a house for a child to live in without ownership being forfeited because the ownership remains within the trust.
- Minimising tax – trust distributions means lower incomes for tax purposes.
- Planning for retirement savings – the flexible structure of trusts presents an opportunity to accumulate wealth that can supplement superannuation savings.
- Flexibility to invest in property – unlike super, holding assets within a trust doesn’t have the same strict rules.
- Capital Gains Tax (CGT) – family trusts have CGT advantages compared to companies. This is because the 50 per cent discount factor on capital gains received for assets retained for at least a year applies to trusts but doesn't apply to companies.
What are the risks?
One of the major risks or disadvantages of a family trust is that it can't distribute capital or revenue losses to its beneficiaries. As a result, should a trust incur a net loss, its beneficiaries won't be able to offset that loss against any other assessable income that they may derive.
Other risks and disadvantages to setting up a family trust can include:
- Tax risks – tax avoidance can be a risky business and a tax accountant should be consulted before you unknowingly get yourself in trouble.
- The name holding the assets – the trustee is the legal owner and this individual’s name will appear across all documentation.
- Loss of ownership of assets – personal ownership of property is lost when managed through a trust.
- Additional administration– this costs time and money long-term.
Of course, with any type of legal documentation or taxation advice, it's always advisable to consult the experts to best understand your individual situation.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation, and needs.
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