Unlocking the Power of Family Trusts | 3 Compelling Reasons to Own One

Chances are most of the recent media coverage you’ve seen surrounding family trusts relates to the legal spat between mining mogul Gina Reinhardt and her three adult children, but the good news is you don’t have to be a billionaire to reap the benefits they offer.

The first thing you need to know about family trusts (or discretionary trusts) is that much of the benefit depends on the investments they hold and their intended purpose. Assuming they’re set up properly, family trusts will hold and protect assets that are most likely to appreciate in value, like shares or land, while also allowing for succession planning and the transfer of wealth to future generations without immediate tax consequences.

Despite ongoing changes to the rules that govern them, family trusts remain an attractive tax-effective investment alternative to wealth building outside of super. They can also be a highly flexible way of boosting your family’s retirement nest-egg, especially compared with direct investment. Unlike a super fund, holding assets within a family trust doesn’t necessarily lock them away for years on end.

It’s true, the mechanics governing family trusts seem to be a constantly moving feast. However, don’t forget that some of their most attractive benefits – the ability to stream different classes of income to different beneficiaries, and the ability to “income split” have not been tampered with.

Let’s take a look at the benefits of these key features in more detail.

Firstly, streaming income allows trustees to stream interest and dividends from the trust to a company beneficiary, which then pays tax at the company tax rate of 25 per cent, and to stream capital gains to individuals so they can enjoy the individual capital gains tax (CGT) discount.

Passive income

Secondly, income splitting lets you (the trustee) use different marginal tax rates to pay less tax. Often referred to as a ‘tax rate arbitrage’, income splitting lets you (the trustee) choose from year to year which beneficiaries will receive entitlement to trust income. This means that the way you (the trustee) appoint income can change to reflect the changing (relative) marginal tax rates within your family group.

If the penny hasn’t already dropped, you should realise by now that income splitting can also be used to rebalance family wealth between you and your partner. As a case point, if a partner has taken time out of the workforce to raise children, they can take a greater share of trust income in retirement to tax-effectively compensate for a smaller super balance.

Tax arbitrage opportunities also arise when money is put into a family trust and then lent to the high income-earning individual for investment purposes. By paying interest to the family trust instead of to a bank, the income is distributed to beneficiaries on low or nil tax rates.

The third significant advantage of holding investments in a family trust – as opposed to a company – is that where the trust makes a gain, 50% of the amount is tax-free provided that the asset is held for more than 12 months. So if you own, or look to own, multiple investment properties, it may make sense to hold the properties within multiple family trusts as a way of reducing land tax payable each year.

Case Study – How a family trust work in practice

Paul and Nancy are both 40 and have two children, aged 9 and 11. They set up a family trust with all four family members as beneficiaries.

By the time they turn 50 Paul and Nancy are both on the highest marginal tax rate. Their trust has $500,000 invested and is yielding $25,000 annually. Their children are both at university and don’t pay any tax.

By appointing or “streaming” the income from the trust to their children, no tax is payable on this income, and franking credits are refundable in full.

By age 65 Paul and Nancy have retired and live off their non-taxable super. Their family trust has $1 million invested and is yielding $50,000 annually. Their eldest child is earning a high income and paying the highest marginal rate of tax. The other is taking time out of the workforce to raise a family.

By splitting the trust income equally between Paul, Nancy and the non-earning child, no tax is payable on trust income and franking credits are refundable.

To find out more about how a family trust can tax-effectively protect and grow your family’s assets call Delta Financial Group on 02 9929 3343 or enquiries@deltafinancial.com.au

Retirement & Superannuation Experts

Mike Sikar

Founder & Principal Advisor

I’ve been a leader and innovator of the financial services industry for almost two decades, as a stockbroker from 1997 – 2007 and as a financial advisor from 2008.

Managing money comes down to basic psychology-understand how it works, know what you want it for and consistently apply the key principles to get the most out of it.



“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

~Benjamin Graham

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