Family trust
A structure where a trustee holds assets and distributes income among family members at their discretion.
In a discretionary trust, the trustee decides each year how to distribute income among a defined class of beneficiaries. Beneficiaries have no fixed entitlement until a distribution is made.
The appeal is flexibility. Income can be directed towards beneficiaries on lower marginal rates, and the trust can retain the CGT discount that companies lose.
Costs and complexity are substantial. Trusts require a deed, annual resolutions before 30 June, separate returns, and careful navigation of rules on undistributed income and distributions to minors.
Trusts also offer meaningful asset protection. Because beneficiaries have no fixed entitlement until a distribution is made, trust assets are generally harder for creditors to reach than assets held personally, which is why they are common among business owners.
How distribution flexibility works
A trust earning $120,000 might distribute across two adults on different marginal rates rather than taxing the whole amount in one person's hands at the top rate.
The bit people get wrong
Distributions to children under 18 are taxed at penalty rates that reach the top marginal rate on very small amounts. The strategy of distributing to minors was closed off decades ago.
Common questions
Is a family trust worth setting up?
Usually only with meaningful income to distribute and several adult beneficiaries on different rates. Below that, costs and complexity outweigh the benefit.
What happens if income is not distributed?
Undistributed trust income is taxed at the top marginal rate, which is why resolutions must be made and documented before 30 June each year.
Do trusts get the CGT discount?
Yes, and the discount flows through to individual beneficiaries — a significant advantage over holding appreciating assets in a company.