Family Trusts and Asset Protection in Australia

A family trust is one of the most common tools used in Australia to hold assets and reduce personal exposure. It can offer real benefits, but it is not a magic shield, and it needs to be set up and run properly. This article explains the basics in general terms.

How a family trust works

In a typical discretionary trust, a trustee (often a company) holds assets for the benefit of a class of beneficiaries, usually family members. The trustee decides each year who receives income or capital, in line with the trust deed. Because no beneficiary owns the trust assets outright, those assets are generally not treated as the personal property of any one beneficiary.

How a trust can help protect assets

• A creditor of an individual beneficiary usually cannot take assets belonging to the trust to pay that person's personal debts.
• Assets can be kept apart from a risky business or a professional practice.
• A trust can add flexibility if a beneficiary later faces bankruptcy or a relationship breakdown.

Where the protection can fall short

• Control: if you control the trust, courts and trustees in bankruptcy may look closely at how it operates. In family law matters, trust assets that a person effectively controls can be taken into account in a property settlement.
• Trustee liability: a trustee is generally personally liable for trust debts, with a right to be reimbursed from trust assets. This is why a company trustee is often preferred.
• Timing: assets transferred into a trust when you are already insolvent, or to defeat a creditor, can be set aside.
• Sham trusts: if the trust is not run according to its deed, its protection can be lost.
• Tax and duty: transfers can trigger stamp duty and capital gains tax, and trusts are treated differently for land tax in NSW. Always get tax advice.

Frequently asked questions

Does a family trust protect my home?

It can help in some situations, but moving a home into a trust has costs and consequences, including duty, tax and the effect on any mortgage. It should be considered carefully with legal and tax advice.

Who should be the trustee?

Many families use a company as trustee to limit the personal liability of individuals, although this involves ongoing company obligations.

Can a trust be challenged?

Yes. A court may look through a trust in some circumstances, for example in a family law property dispute, a bankruptcy or where there is evidence of a sham.