What is a Family Trust?A family trust is a trust established specifically for the benefit of members of a particular family. The purpose of creating a family trust is to protect and manage family assets for current and / or future generations.
In order to appreciate the many benefits that family trusts can provide, it is important to note that the trustees become the legal owners of the trust property once it is settled onto the trust by the settlor(s) for the benefit of the beneficiaries.
7 Reasons To Set Up A Family Trust
There are many reasons to set up a family trust, including:
1. Creditor Protection
Property transferred to the trust is no longer owned by the settlor (or the beneficiaries) and therefore should not be subject to claims from future creditors, provided certain conditions are met at the time of settlement. With creditor protection in place, the settlor may decide to undertake a higher risk occupation or venture with no risk over the trust assets.
2. Protecting Against Relationship Property Claims
Under certain circumstances, if you gift assets to your children during your lifetime, these assets may become available to their partners under relationship property laws should their relationship end. By placing these assets in a trust instead of directly in the name of your children, your children can continue to receive the benefit of those assets without the assets forming part of their personal property and therefore not subject to claims from partners.
Furthermore, if you are married or in a de facto or civil union relationship, it is likely that part of your assets will be relationship property. Should you separate from your partner, the relationship property must be divided between the two of you. By transferring family property to a family trust, the assets become assets of the trust rather than your personal property and may therefore be protected from relationship property claims, subject to applicable relationship laws.
3. Protecting Family with Illness or Special Needs
A family trust may be used to provide for children or other family members who require medical care or have special needs, or who are unable to manage their own affairs through either age or infirmity. Provisions can be made in the trust to protect against other family members who may intend to assume control of the family assets for themselves, following the death of the settlor.
4. Protecting Against Spendthrift Beneficiaries
Trusts can provide for long-term protection of family assets where you have concerns about how certain family members manage their own financial affairs. The income or capital needs of family members can be provided for through the trust as their needs arise rather than handing over your assets to your children who may dispose of them in a reckless manner thus leaving them in poor financial standing in the long term.
5. Flexibility to React to Change in Law
Modern trust deeds usually include provisions which allow variation of the trusts in order to deal with changes in law.
6. Succession Planning for the Family Business
For more details on this area please see our previous post Succession Planning for Family Businesses.
7. Estate Planning
As mentioned above, subject to applicable bankruptcy and family law provisions, assets settled on a trust no longer form part of the settlor’s estate upon his or her death.
Planning Your Trust
When developing your wealth planning objectives, you must first decide whether a trust is suitable vehicle to meet your objectives. Careful consideration should then be given to how the trust is established and how it will be managed going forward. Failure to apply the appropriate diligence to the specifics of the trust and to obtain jurisdiction-specific professional advice may result in the purpose of the trust being defeated.