What is a family trust?
Family Trusts are becoming increasingly popular among people who wish to manage their assets and protect their property, and are mainly used to pass assets from one family member to another or other people who stand to benefit from the assets. The settlor is the owner of the assets and has the all-important task of setting up the family trust. The settlor’s assets will then be transferred to a trust that is managed by a trustee(s) on behalf of the family members as being the beneficiaries.
How does one establish a family trust?
Also referred to as a revocable living trust, a family trust is established using the trust deed – which is the legal contract binding the settlor, the beneficiaries and the trustee. This document includes the names of the trustees, beneficiaries as well as the terms and conditions of the trust. Once it has been established, it will be the settlor’s responsibility to transfer the ownership of assets, including cash, into the trust. It will then be the responsibility of the trustee to manage the transferred assets and income produced by them, as per the instructions set in the trust deed. Setting up a family trust avoids succession consequences in the event of a settlor’s death and has certain tax advantages.
One advantage of having a family trust is that the new created tax entity itself will only pay income tax on income that has been generated by it and that hasn’t been paid out to the beneficiary during the tax year. The family trust will not pay any tax on distributed income, and it is only beneficiary’s responsibility to declare and pay income tax on distributed income towards them. As the trustee can easily determine how the trust income is distributed, a tax planning strategy can be used to simply distributing the taxable income such that it takes advantage of the tax brackets that the beneficiaries benefit from. For instance, the trustee might decide to distribute all the income to a beneficiary who pays no income tax or very little tax at the end of the year or distribute small amounts among all the beneficiaries, which would generate an overall important tax savings for all the parties involved in the this strategy.
Another important advantage that comes with establishing a trust is that once a settlor dies, the assets included in the family trust won’t be subjected to succession rules since a family trust will continue to exist as per the trust deed that provides for all the instructions on how the assets and income should be managed and /or distributed.
Besides the aforementioned advantages, a family trust has some of the following advantages:
• Family trusts help manage assets of someone who is incapable of managing their own affairs, maybe because of infirmity or age.
• A trust also helps with estate administration by transferring different assets to a trust before death. This, in turn, helps in reduction of future costs and income tax.
• Family trusts also ensure that some of the assets are preserved for other family members, which will be able to benefit in the future of the income produced in the trust, as beneficiaries, but without having the control over the assets owned by the trust.
By holding the assets in a family trust, all the mentioned benefits can easily be achieved while the trustee retains full control over the trust property. It’s important to always remember that it’s the trustees who have control over the trust property and not the settlor or the beneficiaries. However, the settlor is responsible for setting the terms of the trust, and the trustees are expected to follow and act by the set terms and conditions of the trust deed.
What is a family trust?