What is a family trust and why would I want to set one up?
A family trust is a legal way to hold and protect your assets (e.g. your family home) for you and your family for the future. The assets will be owned by the trust rather than by a person, and they are managed by trustees (e.g. a family member, a lawyer, or an accountant) for the beneficiaries (usually family members).
There are many reasons to set up a trust, including:
- to put money aside for a specific purpose - e.g. to pay for your children's weddings or tertiary education costs when they grow up;
- to manage the assets of a family member who is unable to manage their own financial affairs;
- to protect your assets from a professional liability claim or unexpected business-related financial problems (which is more relevant if you have your own business);
- to prepare for the possibility that you will need residential care in the future (as the residential care subsidy is income and asset tested);
- to maintain some control over how the assets will be used after you die - for example your offspring are less likely to spend their inheritance unwisely if it is being managed by trustees;
- to protect assets from relationship property claims - e.g. to protect a family heirloom which your child will inherit, so that it doesn’t become relationship property when they grow up and enter a relationship.
Be aware that the transfer of assets to a trust can be challenged in the courts. The court may rule that the transfer has been made solely to avoid your obligations to a spouse or to potential creditors, for example, and may ‘claw back’ the assets from the trust.
There are some drawbacks to having a trust. One is that you will no longer be able to treat the assets held in trust as though they are your own, as decisions about them will be made by the trustees. The other is the costs involved in starting up and maintaining a trust.
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Who is involved in the workings of a trust?
The settlor is the person (or people) who sets up the trust and whose assets are to be transferred to the trust.
The beneficiaries are the people who receive the benefits of the assets held by the trust. For example, they might receive income from the trust, or have the use of trust property. The settlor can also be a beneficiary of the trust.
The trustees are people appointed by the settlor, who are ‘trusted’ to manage the trust’s assets responsibly and in accordance with the trust deed. Trustees must be aged 20 years or over. It is not uncommon for the trustees of a trust to include a mix of family members and independent professional advisors such as lawyers, accountants or a professional trustee organisation.
The trust deed is the legal document which states who the trustees and beneficiaries are and sets out how the trust will be managed and administered.
The settlor can also be a trustee. For example, a family trust set up by you might have as its trustees: you, your spouse and a professional advisor (who is an independent trustee); the beneficiaries might be: you, your spouse and your children. Any decisions the trustees make about the trust must be for the benefit of the beneficiaries.
It is possible for the same person to be a settlor, a trustee and a beneficiary of a trust – but they can’t be the sole beneficiary. The settlor can give themselves the right to remove a trustee or appoint a new one, by including this provision in the trust deed.
If you set up a trust you will generally also need to review your will.
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What are my responsibilities as a trustee?
When you become a trustee, the first thing you’ll need to do is read the trust deed and related documents, and make sure you understand the contents. If you are replacing a trustee you will need to find out what role that person played.
You and the other trustees will be responsible for:
- meeting regularly to review the needs of the beneficiaries and any investments made by the trust
- making and recording trust decisions
- investing trust funds responsibly
- ensuring that the trust complies with its legal obligations
- ensuring that the trust meets its tax obligations
- acting impartially with the good of the beneficiaries in mind
- getting professional advice when appropriate
- not profiting personally from your position as trustee
Trustees are personally liable for all debts incurred by the trust (e.g. as a result of poor investment outcomes), although if the trust takes out a loan, the loan document normally excludes the independent trustee (e.g. the trustee company) from this liability.
More information about your responsibilities as a trustee is on the Matters of Trust website.
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If I set up a family trust, how will it affect my will?
Your will deals with assets that you own personally, and would not apply to assets that are owned by a family trust.
So if you set up a family trust you’ll need a new will which takes this into consideration. It should also deal with any debt that might be owed to you by the trust, and state who will inherit your powers to appoint trustees and beneficiaries according to the trust deed.
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How do I get a family trust set up?
It’s best to get legal advice from an experienced lawyer or trustee company about whether or not it would be advantageous for you to set up a family trust.
If you decide to proceed, you will need to decide:
- what assets should be in the trust (e.g. real estate, cash, shares) and get valuations of those assets
- who will be the beneficiaries
- who will be the trustees – they should be people you can trust and who understand what their responsibilities will be
- what, if any, special rules there will be about how the trust will be run
You should choose the trustees carefully, as removing or replacing a trustee can require a significant amount of legal paperwork and related costs.
At the same time you might also create a Letter of Wishes (or Memorandum of Wishes). This document tells the trustees how you want the trust to be administered, including after you die. It might, for example, give the trustees guidance on who will benefit when you die, prioritise how the trust funds will be used for the benefit of your, and whether the trustees should take your children’s wishes into consideration. Note that a Memorandum of Wishes is not a binding on the trustees, it is just guidance for them.
Assets are usually transferred to a trust through gifting, either all at once or over a period of years. There is no gift duty to pay on the amount gifted (gift duty was abolished in October 2011).
It’s best to get legal advice from an experienced lawyer or trustee company about how to structure your family trust and how the gifting should proceed, and to draw up the trust deed so that it clearly sets out what the trustee/s can and can’t do.
More information about setting up a family trust is on the Sorted website.
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How much will it cost to set up a family trust?
The fees will depend on how complex the trust turns out to be, how much the lawyer or trustee company charges for their services, and whether they will be one of the trustees.
- Start-up costs. These include the legal costs in drawing up the trust deed and setting up the gifting programme. You can expect to pay around $3000 for this.
- On-going management fees. If a lawyer or trustee company is one of the trustees, they will charge fees for things like running annual meetings, administering the gifting, and handling any income that is earned by the trust. This could cost several hundred dollars per year. It might be cheaper to not have an independent trustee, but an independent trustee can ensure that the trust is administered properly.
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How are disputes settled between trustees or between trustees and beneficiaries?
The trustees are supposed to act under the terms of the trust deed and in the best interests of the beneficiaries. Usually the trust deed will state that the trustees have to act unanimously in their decisions. The trust deed may also include instructions for resolving disputes.
If a dispute proves difficult to resolve, mediation can be an option. This could be done through the lawyer who set up the trust or through a professional mediator. Otherwise, such disputes are generally settled in the High Court. Depending on the situation, the court could:
- review a trustee’s actions and require them to justify their decisions
- require the trustees to provide information to the beneficiaries (e.g. about the trust deed, financial statements)
- force the removal of a trustee
- replace a trustee with a new one
If you have a dispute over the management of a family trust and are thinking of going to court about it, it’s best to get legal advice first.
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Is it possible to remove or replace a trustee?
A trustee might be removed or replaced because:
- they have died
- they are unfit for the role
- they refuse to fulfil their role
- they no longer wish to be a trustee
- they are a company which has ceased trading
The trust deed should include a clause which specifies who has the power to remove a trustee. If there is no power of removal built into the trust deed, or the unwanted trustee refuses to go, you can apply to the court to resolve this.
It is also possible for the beneficiaries (if they are all in agreement) to apply to the court to have a trustee removed. Be aware, though, that going to court can be an expensive and time consuming process.
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Can we dissolve or wind up our family trust early?
The trust deed must specify an end date for the trust, and in general a family trust can only be in place for a maximum of 80 years. The deed may give trustees the power to wind up the trust early or extend its life (up to the 80-year maximum).
You might want to wind up a family trust early for a number of reasons, for example:
- the reason for establishing the trust in the first place has changed (e.g. the trust was established to fund the education of certain offspring, and they have now ended their education)
- the trust was set up for the benefit of parent/s and children but the parents are now deceased - so the children might decide to wind up the trust and distribute the assets among themselves.
- the trust was set up by a couple, and that couple has decided to separate
- you no longer think there is any benefit to having a family trust
Check the trust deed for a dissolution or winding up clause, as this will tell you whether the trust can be wound up early and in what circumstances. It’s also a good idea to get legal advice about the implications of winding up the trust, for example about the distribution of the assets, in terms of the tax obligations, and liability for any losses made by the trust.
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Our home is in a family trust and my partner and in-laws are the beneficiaries. Does this mean I won’t get a share of the house if we separate?
If the house is owned by a family trust and you are not a beneficiary of the trust, then you will probably not have a claim on the house if you and your partner separate.
In this situation, if you separate you can apply to the Family Court for a relationship property order. The court could order compensation in another form, for example a payment of money. You will probably need to get legal advice if you are thinking of doing this.
More about the division of relationship property after separation is on our Relationship property page.
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Can I get a rates rebate if my home is owned by a family trust?
The Rates Rebate Scheme is a subsidy to help low-income homeowners with the cost of their rates, and is administered by the local councils.
In order for you to be eligible:
- your income must be below a certain maximum,
- you must be usually living at that address and
- you must be registered on the Certificate of Title as the ratepayer.
If your home is owned by a family trust, then most likely the trustees (not you) are named on the Certificate of Title and on the rates database.
However, if you are paying the rates, you can have yourself registered as a ratepayer on the Certificate of Title, after which you can apply to your local council for a rates rebate. As this process requires a certain amount of legal expertise you will probably need to get a lawyer to help you.
Note that a trust or organisation can’t apply for the rates rebate, only an individual can.