Explainer: Do you have to be rich to start a family trust?

But how exactly do they work? Do you need to be rich to start one? And — critically — as theA family trust is an agreement in which a person or entity agrees to hold assets on behalf of others.–“Trusts generally distribute their income annually to beneficiaries who are then required to pay tax on that income, i.e. the trust is not usually taxed on the income directly,” says HLB Mann Judd tax partner Peter Bembrick.

“If your trust has an asset that is earning you money, you can distribute that to everyone in your family ... so they can all use up that $18,200 tax-free threshold. So if you’ve got three kids, that’s $60,000 tax-free.”“The assets of a family trust are administered and controlled by the trustee of the trust, and not by the individual beneficiaries. This can provide excellent asset protection advantages in certain circumstances, for example, if a family member is sued,” says Mr Bembrick.

For example, people in the medical professions, financial services and those who give advice may be at a greater risk of litigation, may want to add a layer of protection around their assets.“Unlike super contributions, which are locked away until you reach retirement age, family trust assets are available to the family at any time, with the main limiting factor being the capital gains tax payable on accrued capital growth when trust assets are cashed in,” Mr Bembrick says.

“Other important considerations include the cost of running the trust and the level of asset protection required.”“With investment portfolios, enough investment income should be generated to at least make income splitting between spouses worthwhile,” adds Mr Bembrick.Setting up a family trust is fairly straightforward and can usually be completed within one month.

Preparing tax returns, costs for maintaining the corporate trustee and annual accounting costs will also add up.“[The ATO] has indicated concerns about trust distributions made to adult children and has released a draft guidance on trust reimbursement arrangements,” says Mr Bembrick.

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