Is it worth setting up a family trust in Australia? How to do it and the Pros and Cons

For many Australian families, a discretionary trust is one of the most effective structures available for protecting wealth, reducing tax, and managing how assets pass between generations. But it’s not the right fit for everyone, and the costs involved mean you need a clear picture before committing.

This article covers what a family trust actually is, how to set one up, what it costs, and where it can go wrong.

 

What Is a Family Trust in Australia?

A family trust is a legal arrangement where a trustee, either an individual or a company, holds and manages assets on behalf of a defined group of beneficiaries, typically family members. The trustee controls the assets according to the rules set out in a document called the trust deed.

Most family trusts in Australia are structured as discretionary trusts. That name refers to the trustee’s power to decide, each financial year, how much income and capital each beneficiary receives. That flexibility is the main reason they’re so widely used for tax planning. The assets held inside the trust are separate from the personal assets of the beneficiaries, which matters a great deal for protection from creditors.

 

Is a Family Trust Worth It in Australia?

The short answer: possibly, depending on your income levels, asset base, and long-term plans.

A family trust makes most sense when there are multiple family members with different marginal tax rates. By distributing income to those on lower rates, the family unit as a whole pays less tax overall. For a family where one partner earns $200,000 and another earns $30,000, the tax savings from income splitting can easily justify the setup and running costs year after year.

Asset protection is another reason people choose this structure. Because the trust legally owns the assets, not the individual beneficiaries, those assets are generally protected if a beneficiary faces bankruptcy or litigation. That’s particularly relevant for business owners carrying personal risk.

Where a family trust is harder to justify is when all adult members of the family are on similar high incomes, leaving limited scope for income splitting. Trusts also can’t distribute losses to beneficiaries, so if negative gearing is part of your investment strategy, a trust structure can trap those losses inside and prevent them from offsetting your personal income. Get specific advice from Bentleys accountants before making a decision, because the right structure depends heavily on your circumstances.

 

How to Set Up a Family Trust in Australia

Setting up a family trust involves several steps and requires both legal and accounting input.

1. Choose the trust type. The discretionary trust is the most common option for families. Unit trusts and hybrid trusts exist but serve different purposes. For most family wealth-management situations, a discretionary trust is the right starting point.
2. Appoint a settlor. The settlor is the person who formally establishes the trust by transferring a small initial sum (often $10) to the trustee. The settlor should be independent of the trust, meaning they should not be a trustee or beneficiary. This is a legal requirement that’s easy to overlook.
3. Appoint a trustee. The trustee manages the trust’s assets and makes distribution decisions. This can be an individual or a company. More on this below.
4. Draft the trust deed. The deed is the governing document. It defines who the beneficiaries are, what powers the trustee has, and how distributions must be handled.
5. Pay stamp duty on the trust deed. Stamp duty applies in most states, typically on the initial settled sum. The amount is generally modest but varies by state.
6. Apply for a Tax File Number (TFN) and ABN. The trust is a separate tax entity and needs its own TFN and ABN from the ATO. This can be done online through the Australian Business Register.
7. Open a bank account in the trustee’s name as trustee for the trust.

Setup costs vary. A basic discretionary trust with an individual trustee typically costs between $1,500 and $3,000 in legal fees. A corporate trustee structure adds the cost of incorporating a company, usually another $1,000 to $2,000. Annual compliance, including tax return preparation and accounting, generally runs $1,500 to $3,000 per year depending on the complexity of distributions.

 

Choosing the Right Trustee

Individual trustees are simpler and cheaper to set up. However, there are practical problems: if the trustee dies or loses capacity, the trust can be disrupted until a new trustee is formally appointed. Anything held in the trustee’s personal name also needs to be transferred when trusteeship changes, which can trigger stamp duty on real property.

A corporate trustee, a company set up purely to act as trustee, solves most of these problems. The company continues to exist regardless of what happens to the shareholders or directors. It also provides limited liability for the trustee role, meaning the individual directors of the trustee company are generally not personally liable for trust debts.

For trusts holding real estate or running a business, a corporate trustee is almost always the better choice. The extra upfront cost is worth it for the structural protection it provides.

 

Drafting the Trust Deed

The trust deed is the foundation of the whole structure. A poorly drafted deed can limit the trust’s tax flexibility, create disputes between beneficiaries, or produce unintended outcomes decades down the track.

A good deed should clearly define who falls within the class of beneficiaries, what powers the trustee has to accumulate or distribute income, how capital gains can be streamed to specific beneficiaries, and who holds the power of appointment (the right to replace the trustee). That last role, often called the appointor, is arguably the most powerful position in the structure, because the appointor can remove and replace the trustee at any time. Choose who holds this role carefully.

The deed should also address the trust’s vesting date, which is the date on which the trust must be wound up and assets distributed. Under Australian trust law, this is generally capped at 80 years from the date of establishment (NOTE: Queensland-governed trusts now have a 125-year limit from August 2025). Many modern deeds allow the vesting date to be extended within that limit.

 

Tax Implications of a Family Trust

Income splitting is the primary tax benefit. Each year the trustee has discretion to allocate income to beneficiaries in ways that minimise the overall tax bill. Distributing to a spouse on a lower income, or to adult children with minimal other income, can reduce the family’s combined tax liability significantly.

Trusts also access the 50% capital gains tax (CGT) discount. When a trust asset held for more than 12 months is sold, only half the capital gain is included in the trust’s assessable income. The trustee can then stream that discounted gain to a specific beneficiary, such as one with carried-forward capital losses, to further reduce the tax impact. For more detail on how the ATO’s rules around trust distributions work in practice, including the rules around section 100A, it’s worth reading up before finalising your distribution strategy each year.

Another common strategy is distributing income to a “bucket company,” a corporate beneficiary that receives trust income at the company tax rate of 25% or 30%, rather than at an individual’s marginal rate of up to 47%. The bucket company strategy can be highly effective when individual beneficiaries are already in top tax brackets.

One important caveat: minors (under 18) who receive unearned trust income above $416 are taxed at penalty rates under the minor beneficiary tax rules. Distributing to children under 18 to reduce tax is largely ineffective.

 

Pros of Setting Up a Family Trust

The three main advantages come down to asset protection, tax flexibility, and estate planning.

On asset protection: because the trust owns the assets, a creditor pursuing a beneficiary personally generally cannot access trust assets. This is particularly relevant for business owners, professionals carrying personal liability (such as doctors or builders), or anyone operating in a high-risk environment. The protection is strongest when the trust has been in place well before any financial difficulty arises.

On tax flexibility: the trustee’s discretion to vary distributions year by year means the family can respond to changing income levels. If one beneficiary earns significantly more in a given year, distributions can be redirected. Few other structures offer that level of responsiveness.

On estate planning: assets in a family trust do not form part of a deceased person’s estate in the same way that personally owned assets do. This can simplify succession and, with proper planning, allow wealth to transfer across generations without triggering the delays and costs of probate. Bentleys’ effective estate planning resources cover how trusts fit into a broader estate plan.

 

Cons of Setting Up a Family Trust

The costs are real. Setup fees, annual accounting, and trustee compliance add up. A trust that holds a single investment property and distributes to two beneficiaries might cost $2,000 to $4,000 per year to maintain properly. Over a 20-year period, that’s a significant sum. Those costs need to be weighed against the actual tax savings each year.

Trusts cannot distribute losses. If your investment strategy relies on negatively geared assets, the losses sit inside the trust and cannot offset income you earn personally. This is a structural limitation that many people don’t fully appreciate until they’re in it.

There’s also administrative complexity. Trustees have legal duties, and breaching those duties can expose them to personal liability. Distribution resolutions must be made before 30 June each year or the ATO may tax the entire trust income at the top marginal rate. Records need to be maintained properly. These aren’t insurmountable obligations, but they do require attention every year without fail.

Family disputes are another risk. If the trust deed is vague about how distributions should be made, or if the relationship between family members deteriorates, the trustee’s discretionary power can become a source of conflict. A well-drafted deed and clear communication about expectations go a long way toward avoiding this.

Land tax is also worth factoring in. Some states do not allow the land tax threshold to apply to trust-owned property, meaning a property held in a family trust can attract higher land tax than the same property held personally. In Victoria, New South Wales, and Queensland, this is a meaningful consideration for property investors.

 

Annual Compliance Obligations

Trusts have their own compliance requirements, separate from those of the individual beneficiaries. Each year the trustee must prepare a trust tax return, pass a distribution resolution before 30 June, and issue tax statements to beneficiaries.

The ATO has increased scrutiny of trust distributions in recent years. The section 100A rules target arrangements where trust income is distributed to a low-tax beneficiary but the economic benefit is actually enjoyed by someone else, such as a parent who receives distributions to an adult child’s account but uses the money themselves. These arrangements can result in the trustee being taxed at 47%. Getting distributions right every year matters.

Trusts also need to keep their TFN and ABN details current with the ATO, maintain proper financial records, and ensure the trust deed remains appropriate for the family’s current circumstances. The ATO’s guidance on trust compliance is the authoritative source for current requirements.

For families with significant assets or complex structures, the tax advisory services at Bentleys can handle this compliance and flag any issues before they become problems.

 

Family Trust vs Company: Which Is Better?

These two structures serve different purposes and often work best in combination rather than as alternatives. A company provides limited liability and a fixed tax rate, but lacks flexibility in how profits are distributed to shareholders. A family trust offers distribution flexibility and CGT benefits but comes with the compliance obligations described above.

Many business owners use both: a trading company that operates the business, with the trust holding shares in the company and receiving dividends. This keeps trading risk in the company while distributing profits tax-effectively through the trust. If this kind of structure interests you, Bentleys’ financial planning and wealth management team can help model the options.

 

A Practical Next Step

A family trust is worth setting up if the tax savings and asset protection benefits outweigh the setup and ongoing costs for your specific situation. Run the numbers. A good tax adviser can estimate the likely annual tax saving based on your family’s income levels and compare that against the annual compliance cost. If the saving is $5,000 per year and the compliance costs $2,000, the case is clear. If the saving is $1,200 and the compliance is $2,500, it probably isn’t.

The structure works best when it’s set up properly from the start, maintained consistently, and reviewed when family or financial circumstances change.

 

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

 

FAQs

Is a family trust worth it in Australia for tax planning?

A family trust can be highly effective for tax planning because it allows trustees to distribute income to beneficiaries in lower tax brackets, helping reduce the overall family tax burden.

How does a discretionary trust protect my assets?

In a discretionary trust, beneficiaries do not legally own the assets. This separation can help protect trust assets from personal creditors or bankruptcy claims against individual beneficiaries.

What are the main disadvantages of a family trust in Australia?

The main disadvantages include setup costs, annual accounting fees, complex compliance obligations, and the risk of undistributed income being taxed at the highest marginal tax rate.

How much does it cost to set up a family trust in Australia?

Establishment costs commonly range from $1,500 to $2,500 plus GST, depending on the trust structure and whether a corporate trustee is used.

What is a corporate trustee and why should I use one?

A corporate trustee is a company appointed to manage the trust. It provides stronger asset protection, simpler succession planning, and limited liability benefits compared to individual trustees.

Can I distribute trust income to my children?

Yes, though strict tax rules apply to minors. Most distributions above $416 to beneficiaries under 18 are taxed at penalty rates to discourage income splitting.

What is a Family Trust Election (FTE)?

A Family Trust Election is a formal election lodged with the ATO that allows a trust to access certain tax concessions and distribute franking credits within a defined family group.

Does a family trust pay capital gains tax?

Generally, capital gains are distributed to beneficiaries, who then pay tax at their own marginal rates. Eligible trusts may also access the 50 per cent CGT discount.

What is the role of the Appointor in an Australian trust?

The Appointor has the power to remove and replace the trustee, making them one of the most important control positions within the trust structure.

Can a family trust own my family home?

Yes, but owning a main residence through a trust can result in the loss of the main residence CGT exemption and may increase land tax liabilities.

What is a bucket company in a family trust structure?

A bucket company is a company beneficiary used to cap tax on distributed trust income at the corporate tax rate when individual beneficiaries are already in higher tax brackets.

How do I set up a family trust in Australia?

Setting up a trust involves drafting a trust deed, appointing trustees and beneficiaries, settling the trust, and obtaining a TFN and ABN where required.

What is a trust deed?

A trust deed is the legal document governing how the trust operates, including trustee powers, beneficiary rights, and distribution rules.

Does a family trust expire?

Most Australian trusts are subject to a vesting period, commonly 80 years, though some states now allow longer durations.

Can a family trust be used for a family business?

Yes, many Australian family businesses operate through discretionary trusts for tax flexibility and asset protection purposes.

What happens if the trustee does not distribute income by June 30?

Undistributed trust income may be taxed to the trustee at the highest marginal tax rate if valid distribution resolutions are not completed before year-end.

Who can be a beneficiary of a family trust?

Beneficiaries are usually defined broadly and may include family members, spouses, related companies, and charities depending on the trust deed.

Can I use a family trust to avoid a Div 7A tax bill?

Careful structuring is required because unpaid trust distributions to company beneficiaries can trigger Division 7A rules if not managed correctly.

What is a Section 100A risk?

Section 100A targets arrangements where trust income is distributed to one person but the financial benefit is enjoyed by another to reduce tax.

Is a family trust different from a discretionary trust?

In practice, a family trust is usually a discretionary trust that has made a Family Trust Election for tax purposes.

Do I need a separate bank account for my family trust?

Yes, trusts should operate through separate bank accounts to maintain clear legal and financial separation from personal funds.

Can a family trust borrow money for investment?

Yes, trusts can borrow funds for investments, though lenders commonly require personal guarantees from directors or controllers.

What is the role of the Settlor?

The Settlor establishes the trust by contributing the initial settled sum and cannot generally be a beneficiary of the trust.

Can I change the trustee of my family trust?

Yes, the trustee can usually be replaced by following the procedures outlined in the trust deed, often through the authority of the Appointor.

How is a family trust treated during a divorce in Australia?

The Family Court may treat trust assets as part of the matrimonial asset pool if one party effectively controls the trust structure.