01 Oct 2025

Family Trusts – Benefits and Considerations

Family Trusts – Benefits and Considerations

The tax advantages of using a family trust are well known – in particular, the ability to split income among family members so that a lower effective tax rate applies to the income. This is unlike the case where one person derives all the income or the trust itself is liable to pay tax on it.

A family trust, like a company, is also a good way to protect assets from potential creditors in the case of financial trouble – or from other parties as the need may arise (e.g., when a family member gets married and may be gifted property or money to buy a house).

So, even though a home held by a family trust is not entitled to the capital gains tax (CGT) main residence exemption, there may be other non-tax benefits that carry greater weight.

A family trust can also be used to help in business succession matters, for example, where farmland is held by a family trust and successive generations of a family can continue to farm it for their benefit.

When a Family Trust Works Best

To effectively use a family trust, you need to have assets it can hold or acquire. It is of no use in trying to obtain tax advantages in respect of personal services income. You need it to be able to hold assets – and preferably good income-producing assets.

Key Limitations and Challenges

While family trusts offer significant benefits, there are also some important demands and restrictions:

1. Complex Rules for Streaming

If you wish to “stream” capital gains and/or franked dividends to certain beneficiaries – so that they retain their character as concessionally taxed amounts in the beneficiary’s hands – there are complex rules that must be followed.

If they are not followed properly, you could end up with a tax result far removed from what you intended. Importantly, the trust deed must allow streaming of gains (which may require an updated deed).

2. Treatment of Capital Losses

If a trust has capital losses, it cannot (unlike a partnership) distribute those losses to beneficiaries. Instead, they remain in the trust and can only be used to reduce future taxable income or capital gains if certain “continuity of ownership” tests are met.

This often involves making an irrevocable family trust election, which locks the trust into distributing all its income to certain beneficiaries only.

3. Distributions to Children

Contrary to common belief, distributions to children are not tax-effective. They are usually taxed at penalty rates, often equating to the top tax rate in most cases (though there is a small tax-free threshold of around $400).

4. Trusts Don’t Last Forever

Trusts generally must be wound up after 80 years (in most jurisdictions). Assets held by the trust will need to be distributed to beneficiaries, which can trigger a large CGT liability. (Just ask Gina Rinehart and her family.)

5. The Div 7A Issue

There is also an important question currently before the High Court about whether a company will be liable for Div 7A tax in respect of “unpaid present entitlements” made to it by a trust. This is a hot issue for those looking to use a family trust effectively for tax purposes.

Final Word

The issue of whether to use a family trust is not always straightforward. While the tax and asset protection benefits can be significant, the rules are complex, and mistakes can be costly.

If you intend to set up a family trust, or believe your current one needs revisions, it’s best to seek professional advice and ensure your structure is set up correctly for your goals.