Estate planning is a critical aspect of financial insurance that establishes exactly what you wish to happen to your assets once you pass. Proper estate planning provides peace of mind and minimises potential disputes amongst your beneficiaries.
One of the key features of estate planning is that it can also lay out what will happen to your property once you pass away. Given Australia’s cut-throat real estate market, this is a popular option that many individuals are looking into, and one of the best ways to manage this is through the creation of a family trust (otherwise known as a discretionary trust).
Given its several benefits, the rise of family trusts are a smart setup for property owners. However, before transferring your assets to one, it is important to take note of several key considerations that we will outline in this blog below.
What is a Family Trust and How Does It Work?
A family trust is a legally binding arrangement where one person (the trustee) holds and manages assets for the benefit of others (the beneficiaries), both during life and after death. Unlike a fixed or unit trust, the beneficiaries of the trust have no defined entitlement to the income or assets of the trust. This means that every year, the appointed trustee can decide which beneficiaries are entitled to receive a portion of the trust, and how much they should get.
Players Involved in a Family Trust
Several individuals become involved in a family trust for it to run properly and in accordance with the law. These different parties each have an important role to play and it is critical that anybody setting up a family trust understands them.
Settlor
The settlor is the person responsible for initially setting up the trust and naming the beneficiaries, the trustee and the appointer. For taxation purposes, the settlor should not be a beneficiary under the trust.
Trustee
The trustee (or trustees) administers the trust. The trustee owes a duty directly to the beneficiaries and must always act in their best interest. All transactions for the trust are carried out by and in the name of the trustee.
Beneficiaries
The beneficiaries are the people for whose benefit the trust is created and administered. Beneficiaries can be either primary beneficiaries (named in the trust deed) or general beneficiaries (often not named individually and could be future children, grandchildren and relatives of the primary beneficiary).
Appointor
Many (but not all) trusts also have an appointer. The appointer is often put in as a safeguard and is the only person who could have the power to appoint and remove the trustee.
Family Trust Benefits
Family trusts can offer levels of protection for your assets, including property, that other estate planning documents do not. The benefits of establishing a family trust are as follows:
1. Asset Protection
Family trusts can protect assets/property from creditors, lawsuits and other claims. It can also protect the assets if beneficiaries were to go through a ‘crisis state’ such as bankruptcy or divorce.
2. Tax Premiums
By splitting the trust income amongst several eligible adult beneficiaries, the family group can potentially result in an overall tax savings as opposed to all the income from the trust being taxed to one person.
3. Seamless Property Management
Putting your property into a family trust means that if you pass away the management and disbursements of the property remain in the trustee’s realm. This means that in effect, the trustee will own the investment property on your behalf, and this appointment remains even after your death.
4. Control of Asset Distribution
The settlor who creates the family trust can specify when and how beneficiaries receive the trust assets, which is useful for managing the financial needs of minors or beneficiaries with developmental disabilities.
5. Privacy
Unlike wills, which go through probate and become public records, trusts generally remain private.
How to Transfer Property to a Family Trust
A family trust is a great way to protect your and your families assets. This is also true of Property. The Australian property market is one of the most lucrative markets in the world, and property transfer from Baby Boomers to their children will be one of the largest generational wealth transfers in history. Therefore, it is important that your descendants know what your wishes are with any property you may own and that they may inherit.
There are different ways to transfer future assets versus existing assets, such as the family home, into your newly established family trust. Once the family trust has been set up, you will need to transfer the property title into the trust. This means that essentially you’re transferring the interest in that property to the trustee, and they will become the new legal owner of that asset. However, it is important to bear in mind that transferring the property title to trust may have CGT and stamp duty implications.
Selling
The process of selling property into a family trust is in essence the same as a buyer and seller entering into a contract of sale – you would be the seller and the trustee would be the buyer. You could either sell the property at market value or below market value, however both of these options come with CGT and tax liability implications, so best to consult with a property solicitor prior to selling.
Gifting
The second option with transferring property into the family trust is to gift the property to the trustee. The trustee and trust will have to sign a ‘gift deed’ which establishes that the ownership of the property is being transferred without payment. This can be a slightly more complex procedure, particularly if you still have an outstanding home loan on the property as the loan will be transferred to the family trust and the trustee will have to go through the loan approval process.
Key Considerations to Note
While there are many positives in transferring property assets to a family trust, it is important to be aware of the potential drawbacks as well. Firstly, the potential costs of setting up the family trust and transferring the property into it can include solicitor fees, accounting and taxation specialist fees, and potential trustee fees. Other administrative fees that may occur is stamp duty and capital gains tax implications, both of which could increase your tax owing at the end of financial year.
It is also prudent to be aware that once a property has been transferred to a trust, the legal ownership is held by that trust and the trustee legally has control over the property. Decisions about the property must be made in accordance with the terms of the trust and the interest of the beneficiaries, which can be restrictive to the former property owner.
Trust structures can also be complex, and the rules governing them can be rigid. Changes to the trust, such as adding or removing beneficiaries or altering the terms of the trust often require legal assistance and can be difficult to implement. This lack of flexibility can be a disadvantage in situations where the family’s circumstances change.
Takeaways
While family trusts can offer significant benefits, property owners must carefully consider the potential drawbacks and expenses associated with transferring property into a family trust. Consulting with a legal and financial professional is critical to completely understanding the implications and to ensure that the decision aligns with your overall estate planning goals.
Frequently Asked Questions
Seeking professional advice can help to avoid disputes in the transfer process.
Whether or not you can move back into the property later depends on your unique circumstances.
Yes, property can be transferred by gift or to family without a sale.