Every parent is concerned for the welfare of their children, particularly when it comes to their financial future. One of the most effective solutions is to establish a trust for your children. This has become increasingly common for many Australians, and is no longer the preserve of the super wealthy.

So, what exactly is a trust and what does it achieve?

A trust is a means of holding control and ownership of an asset that separates those who benefit from the assets, from those who establish the trust and make the decisions. A trust will normally consist of three main roles:

  1. Settlor: this is the person responsible for establishing the trust and vesting the assets in it
  2. Trustee: this is the person or persons responsible for administering the trust, determining how the assets will be invested, and how capital and profits will be allocated.
  3. Beneficiaries: those who reap the benefits of the trust.

Establishing a trust can therefore provide parents (usually the settlors and often the trustees) with a means of establishing assets and income streams for the benefit of their children (the beneficiaries). So, what are the main advantages of setting up a trust structure?

  • Asset protection. Having a trust for your children can remove assets from being under their control and hence vulnerable should they be pursued by creditors or are involved in a relationship breakup. Individual circumstances will affect how this occurs and it should be noted that in the event of a divorce the courts do possess the rights to look beyond trust structures and see assets held in them as part of the pool of funds a partner may be entitled to.
  • Income tax benefits. Under certain trust structures the trustee may decide from year to year how they want to see profits distributed. This provides a means of maximising tax benefits as income can be channeled towards those with the lowest tax rates.
  • Fee reductions. If you own several investment properties a separate trust structure for each one can help maximise thresholds for paying stamp duty depending on the state law.

Trusts also have certain disadvantages.

  • Setting up a trust can be anywhere from $500-$2000 or more depending on the complexity involved. There will also be additional ongoing legal requirements which will vary depending on the level of work required.
  • Trustees are responsible for making investment decisions, reporting to trust beneficiaries, and commissioning annual audits. This can be quite daunting and time consuming to someone who has not acted as a trustee before.
  • Trust assets cannot be easily traded, bought or sold without appropriate paperwork and the trustees involvement. Beneficiaries can sometime be frustrated where they are unable to make decisions on these assets themselves.
  • Tax returns. Depending on the type of trust and what it is used for there may be the need to file additional tax returns for the trust entity. Children under the age of 18 are subject to a tax free threshold of about $500. Any income exceeding that is taxed heavily.

There may be advantages for your children in establishing your own trust for your assets as it can provide them with certainty over how assets will be treated after you are gone. Establishing trusts may offer many benefits to your children’s future however every set of circumstances are different.

If you’re interested in setting up a trust for your children, or finding out what you can do to protect your wealth and invest on behalf of your children, you’re best to speak to a professional. A financial adviser (or planner) spends their days identifying and presenting opportunities to their clients. Our simple, quick, free service will connect you to the best independent financial advisers, based on your needs. Click here to get started.

The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.

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