More than 1 million Australians have a family trust. Should you too?

There were just over 1 million trusts registered in Australia in the 2023 financial year, latest available data from the ATO shows, delivering total business income (TBI) of almost $489.5 billion. That averages $478,798.78 earned by every single trust that year. Earnings are likely to be even higher today.

Like all things investing, though, trusts come with their own set of risks and limitations. Let’s explore their pros and cons to help you calculate whether the numbers add up in your favour.

Benefits of operating a trust

When it comes to the potentially lucrative traits of investment trusts, chief among them are:

Tax-friendliness. Trusts don’t pay tax, provided all dispersals are allocated to one or more beneficiaries. Each beneficiary then pays tax at their own income tax rate. You can reduce overall tax, for example, by making the lower-earning spouse the sole beneficiary of funds, or paying dividends into a family company, which pays the company tax rate rather than higher personal tax rates. Additionally, a trust can be eligible for a capital gains tax (CGT) discount.

Accessibility. Unlike super, which you can’t touch until retirement age, earnings held within a trust can be accessed any time. You could, for instance, use funds to supplement your employment income or as a lump sum towards starting a business or helping a younger beneficiary with their first home deposit.

Flexibility. Trusts don’t have the same limitations on asset ownership that super does, giving you greater flexibility where funds are invested. Essentially, anything you can do outside a trust you can do within one. Additionally, you can choose to change beneficiaries any time, preferencing people with the greatest financial need or lowest income tax rate at that time.

Trust exemptions. Distinct types of trusts offer specific benefits or exemptions to standard rules. A disability trust can provide someone living with disability additional income without affecting their Centrelink payments or NDIS access; a testamentary trust allows children to be taxed on earnings at the considerably lower adult tax rate.

Risk protection. As a separate entity, some trusts may provide asset protection to safeguard against future bankruptcy, legal action or relationship breakdowns.

Downsides of operating a trust

Now that you’re excited by the possibilities, temper them with the realities of operating a trust:

Viability. You typically need at least $300,000 to make a trust financially viable as an investment – similar to a self-managed super fund (SMSF). As such, a trust may be out of reach of younger and first-time investors. This may mean investing in your own name in shares or high-interest savings accounts/term deposits to grow funds until there is enough to make a trust viable. Bear in mind this estimated threshold will increase over time with inflation.

Costs. There are registration and advice costs involved, which can be several thousand dollars. Then there are ongoing costs associated with lodging tax returns, registration renewals and ensuring legal compliance, as well as ongoing tax, legal and financial advice expenses.

Bureaucracy. Having a trust isn’t as simple as investing personally. It must be registered with its own tax file number (TFN) and Australian business number (ABN), have a trust deed, and beneficiaries of each distribution must be nominated to avoid the trust being taxed at the highest tax rate.

Analysis paralysis. While options are a good thing, they can be a negative when you either choose the wrong one or become so overwhelmed that indecisiveness stops you doing anything. This can be the trap of trusts. You need to weigh up trust types based on your goals and circumstances, such as a family, unit, disability or testamentary trust.

Appointing trustees. There are risks around who gets appointed trustees. For instance, an individual trustee is usually cheaper to establish than a company trustee but can trigger CGT, should you need to transfer to a different trustee later on (such as if the trustee dies). Beneficiaries have no control over investments and dispersals of funds unless they are also a trustee. Additionally, the trust’s appointer has the power to terminate other trustees – an authority potentially open to abuse.

Key takeaways

Determining whether a trust is the right option for you and, if so, how to make the most of it, will require diligently weighing up these pros and cons.

Make your decision backed by professional advice from your accountant, estate planner and financial adviser – they will help you unravel the complexities and how they apply to your situation.

Finally, remember the old saying about too many cooks: a trust can enable you to pool funds with multiple family members, but the more trustees and beneficiaries there are, the more complicated things get, potentially undoing all that hard work. Trust me.

Helen Baker is a licensed Australian financial adviser and author of the new book Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99).

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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