Beneficiaries are the ones who benefit from trust property, which can be individuals (family, disabled persons, children, charities) or organizations, receiving income, capital, or assets managed by a trustee for purposes like wealth protection, tax efficiency, or supporting future generations, as defined in the trust deed or by the trustee's discretion.
The four main benefits of buying property in a trust are estate planning, tax benefits, asset protection, and profit distribution.
If you're financially responsible for family members, a trust can help ensure their needs are met without interruption. Trusts can also support unmet education funding needs or even a family business startup.
Trustee – this is the person who owns the assets in the trust. They have the same powers a person would have to buy, sell and invest their own property. It's the trustee's job to run the trust and manage the trust property responsibly.
Putting a house in a trust means the legal title to your home transfers from your name to the trust's name. For example: Before: The deed says “John Smith.” After: The deed says “John Smith, Trustee of the Smith Family Trust.”
The trustee is the legal owner of the property in a family trust, but the property must be used only for the benefit of the beneficiaries. This is part of their legal obligation to act in the beneficiaries' best interests.
So, now you know that the Trust Maker holds the most power before the Trust is established, but the Trustee holds the most power after the Trust is established.
The 5x5 Power rule is a way to provide some parameters around the access a beneficiary has to the funds in a trust. It means that in each calendar year, they have access to $5,000 or 5% of the trust assets, whichever's greater. This is in addition to the regular income payout benefit of the trust.
The beneficiary is who will receive the trust property as an inheritance. The named successor trustee is who will either manage the trust property, or distribute it to the beneficiaries. There can be one or more named successor trustees. Also, a trustee can also be a beneficiary.
Outright Distribution of Assets
The grantor can set up the trust so the money is distributed directly to the beneficiaries, free and clear of limitations. For example, the trustee can transfer real estate to the beneficiary by having a new deed written up or by selling the property and giving them the money..
With a trust, there is no automatic judicial review. While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing.
Whether beneficiaries owe taxes or not depends on the type of distribution they receive. Income distributions are taxable, while principal distributions aren't. Each beneficiary receives a Schedule K-1 from the trust, which outlines the reportable taxable income. The trust pays taxes on any undistributed income.
The crackdown has resulted in the ATO undertaking extensive audits of family trusts and historical distributions, and the issue of hefty Family Trust Distributions Tax (FTD Tax) assessments for noncompliance – being a 47% tax (plus Medicare levy) along with General Interest Charges (GIC) on any historical liabilities.
Irrevocable: When you establish an irrevocable trust, you permanently relinquish control of the assets and remove them from your estate, which can offer protection from creditors, lawsuits and divorcing spouses — as well as potential tax benefits.
Loss of Ownership of Assets Held in the Family Trust
You won't have personal ownership of those assets because you're using the family trust as a vehicle to purchase and hold assets. The trustee is the legal owner of those assets.
If simplicity and immediate access are most important, an inheritance may suffice. But for those seeking more control, asset protection, and long-term planning, a trust fund can provide advantages that an inheritance alone cannot.
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.
Once you die, your living trust becomes irrevocable, which means that your wishes are now set in stone. The person you named to be the successor trustee now steps up to take an inventory of the trust assets and eventually hand over property to the beneficiaries named in the trust.
However, the general rule of thumb is that owning assets that collectively total $100,000 or more constitutes a trust rather than a will. Of note, the complexity of your trust may determine how much it may cost you to set it up. That said, there is no enforced limit to the amount of money that can be placed in a trust.
The 50% stake test is used to determine whether there has been a change in the underlying ownership of a trust with fixed entitlements. An alternative version applies where 50% or more of fixed entitlements to the income or capital of an ordinary fixed trust are held by non-fixed trusts – other than family trusts.
Step-By-Step: How To Dissolve A Trust In Australia
The trustee is the person (or people) who holds legal title to the property that is in the trust. The trustee's job is to manage the property in the trust for the benefit of the beneficiaries in the way the settlor has asked.
Examples include improperly managing assets, neglecting any property maintenance, failing to make distributions, or failing to adhere to trust terms. Failing to Provide Beneficiaries with an Accounting: Beneficiaries have the right to receive a formal accounting of trust assets and transactions.
A trust fund holds assets for a grantor on behalf of their beneficiaries and a trustee manages the funds.
If the sale price is less than the market value of the property, the 'market value substitution rule' will apply, meaning the tax office will deem you to have received the market value of the asset at the time of the transfer.