Queensland small-business owners often ask about family trust benefits because a trust can help protect their assets. It can also give them more flexibility over how business income is distributed among family members.
That doesn’t mean a family trust is automatically worth setting up. You also have to account for the additional administration and ongoing responsibilities that come with the structure.
At SecuratorLegal.com.au, we’ve seen these questions come up when people weigh their options. We’ll look at what’s driving the interest in family trusts and what you take on when you set one up.
Family Trusts Can Help Protect Business and Personal Assets
For small business owners, asset protection becomes more important as the company grows. You may take on debts, sign contracts, hire staff, or end up in a dispute with a supplier. If something goes wrong, assets you own personally could be exposed.
A family trust can help create a separation between your trading risks and some of the assets you hold outside the company. It works like this:
- You Set Up the Trust: A trust is established under a trust deed, with a trustee responsible for managing it.
- Assets Are Held Through the Trust: The trustee holds certain assets for the trust’s beneficiaries instead of you owning them personally.
- The Trading Operation Runs Separately: Your company can continue handling its day-to-day operations while those assets remain held through the trust.
- The Separation Can Provide Protection: If the trading operation faces a claim, assets held through the trust may have greater protection, depending on the structure and circumstances.
Now, imagine your company runs into a dispute or cannot pay a debt. If some of your assets are held through the trust, rather than in your name, they’re generally harder for the claim to reach. A family trust can also hold property or shares in a related company, keeping those assets separate from the risks of the day-to-day trading business.
Flexible Income Distribution Can Benefit Family Members
One of the best benefits of a family trust is the flexibility it can give the trustee when distributing trust income. Each year, the trustee can decide how the income is distributed among eligible family members.
Let’s say your spouse earns less than you that year, or your adult child is studying and working part-time. The trustee will be able to distribute some of the trust’s income to them rather than having all of it distributed to you.
A sole trader can’t split business income this way. It belongs to them alone, regardless of their family’s circumstances. By contrast, a company’s profits generally follow its share ownership rather than giving the owner flexibility over who receives them each year. A family trust gives the trustee that discretion instead, though it still depends on the trust deed and tax rules.
Family Trusts Offer Tax Advantages
When we talk to business owners about family trusts, tax often comes up. A trust can give families more flexibility over who receives trust income, which can affect how much tax the family pays overall.
For example, say you earn $120,000 from other sources while your spouse earns $40,000. If the trust distributes $20,000 of its income to your spouse, that $20,000 will be added to their taxable income rather than yours. Your spouse pays tax on that $20,000 at their marginal rate, meaning the rate that applies to their next dollar of income. If their rate is lower than yours, the distribution can result in less tax overall.
Of course, one $20,000 distribution won’t necessarily create a huge tax saving. But the difference can become more significant when one family member consistently earns much less than another. The exact tax benefit, however, depends on each person’s income, the trust’s distributions, and the tax rules that apply.
Those Benefits Come With Additional Administration
None of these benefits come without extra work. Running a family trust means the trustee has to stay on top of ongoing administrative and tax responsibilities, such as:
Keeping Up With Annual Tax and Records
You’ll need to keep income, expenses and supporting documents organised throughout the year. You’ll generally need to arrange an annual tax return as well. That can mean extra work for your accountant and a few more records for you to keep track of.
Making and Recording Distributions
Deciding who receives trust income isn’t something you can handle informally. Distribution decisions need to follow the deed and be documented properly. For example, moving money to a family member doesn’t automatically make it a valid trust distribution. The timing, paperwork, and tax treatment all need to line up.
Following the Trust Deed
The deed sets the ground rules for how the arrangement operates. You’ll need to work within those rules when making decisions as trustee, rather than treating the structure like an informal family arrangement. Business.gov.au confirms that a trust requires a formal trust deed outlining how it operates and requires the trustee to undertake formal yearly administrative tasks.
Do Family Trust Benefits Justify the Extra Administration?
It depends on your situation. A family trust can help protect assets, give you more flexibility over income distribution, and create potential tax benefits. But you’ll also take on extra setup costs, tax obligations, and yearly administration.
By now, you should have a clearer picture of that trade-off. If your business has assets to protect or your family’s income varies between members, the benefits could make the extra work worthwhile. Without those needs, you might not need the added complexity yet.
Still, don’t make the decision based on the potential benefits alone. Before setting up a family trust, get tax and legal advice based on your business, assets, and family circumstances. Securator Legal offers free phone consultations if you’d like to talk through your situation.
Ava Mitchell turns celebrity facts into smart, scroll-worthy stories at Star Ledger Pro, backed by 3 years of experience.
