Understanding Family Trusts

A family trust is a common type of trust used to hold assets or run a family business.

Essentially, it is a relationship where a trustee holds property or assets for the benefit of a beneficiary or beneficiaries.

Trusts can benefit anyone who wants to manage their money in a way that is more tax effective and beneficial to their family.

As a general rule, Trusts are not taxed. When trusts make income they distribute to other taxpayers i.e. individuals and companies. These individuals and companies then pay tax on the income.

If a trust does not distribute the income then they pay tax at 47%.  Trusts allow you to distribute income to more than one taxpayer. This is beneficial where you have multiple beneficiaries to distribute to.

A discretionary trust has become widely viewed as an effective way of protecting assets. The reason that discretionary trusts have been so popular stems from the fact that a beneficiary’s interest in a discretionary trust has not traditionally been considered to be “property”. This means that if the beneficiary becomes bankrupt or is sued personally, assets held in the discretionary trust are protected against those claims because they do not form part of the beneficiary’s property or assets.

For asset protection reasons it is usually best to have a company act as trustee. This is because a trustee is personally liable for the debts and transactions they undertake on behalf of the trust as the trustee is the relevant legal entity. Therefore, it is the trustee that is sued if anything goes wrong.

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