The Benefits Of Using A Trust

Michelle Bromley CFP®, Director – Strategy and Advice

The use of structures, like Trusts and Companies, has many advantages from the point of view of tax and estate planning, and asset protection. However, they are subject to complex rules and regulations meaning professional legal, tax and financial planning advice are a must.

Advantages of a Trust

  • Asset Protection as beneficiaries don’t have an interest in Trust property
  • Estate Planning for intergenerational Wealth Management
  • Protection from Will challenges as assets don’t form part of the estate
  • Very flexible for streaming income tax effectively

Disadvantages of a Trust

  • Complicated legal structure that requires professional advice
  • Additional cost to establish and administer
  • Trustee has fiduciary obligations to deal with Trust property and settle debts
  • Taxed at top marginal rate on undistributed income and cannot distribute losses to beneficiaries

What is a Trust?

A trust is a structure which allows a person or other entity (the ‘Trustee’) to hold property for the benefit of others (the ‘beneficiaries’).

There are many different types of Trusts – bare, unitised (fixed), discretionary (non-fixed), testamentary and superannuation, amongst others.

Why consider using a Trust?

Trusts have several key benefits including flexibility for tax purposes, asset protection from creditors and litigants, and management of inter-generational wealth for family members – including protection for vulnerable beneficiaries such as minors and those with disability or other issues.

How is a Trust Established?

The simplest form of Trust is a Bare Trust. An example is where a parent opens a bank account for their child. The legal owner is the parent, but the beneficial owner is the child. The Trustee has no discretion and no active duties other than transferring the asset to the beneficiary when required. The beneficiary is liable to pay tax on any income or capital gains.

Formal trusts are created by executing a Trust Deed – either during a person’s lifetime (called an Inter Vivos Trust – meaning ‘between the living’) or following their death via Testamentary Trust clauses included in their Will.

Discretionary Trusts

A Discretionary Trust is created between the ‘Settlor’ and the ‘Trustee’. The Settlor establishes the Trust with a nominal gift of Trust Property (usually $10) and by creating a Trust Deed to set out the terms on which the Trust Property will be managed by the Trustee exercises their discretion within the terms, and the date on which the Trust vests – generally a Trust has a maximum lifespan of 80 years.

The Trust Deed will name the key parties to the Trust including:

  • Settlor – creates the trust deed and makes the initial settlement of trust funds
  • Appointor – one or more individuals who can appoint or remove the trustee
  • Trustee – can be one or more individuals, or a company
  • Beneficiaries – generally a primary beneficiary is named with broader categories of general beneficiaries

Family Trust Election

While your discretionary trust usually benefits your family members, the term ‘Family Trust’ is reserved for Trusts that have made the Family Trust Election (FTE).

Under the FTE, the Trustee forms a family group around a particular person (the ‘test individual’). The group will include that person’s spouse and children, plus broader family members such as their parents, grandparents, and nieces/nephews of the test individual and their spouse, any lineal descendant of these individuals, and spouses of any of these people.

The benefit of making the FTE is that the Trust can then distribute more than $5,000 of franking credits to beneficiaries and allows the Trust to carry forward income losses, which can’t be distributed to beneficiaries, to offset Trust income in future financial years.

Tax Benefits

Overall tax payable within the family group can be minimised by the trustee exercising discretion around payment of income. If allowed under the Trust Deed, different classes of income can be specifically identified and streamed to those who can benefit most tax effectively.

Starting with individual beneficiaries, low income or non-working family members such as adult children who are studying, are entitled to a tax-free threshold (combined with the Low and Middle Income Tax Offsets) of up to $21,885 (FY 2022-23) and the lower marginal tax rates thereafter.

Minors under age 18 are subject to higher tax rates than adults, with only the first $416 of unearned income being tax-free. However, the benefit of a Testamentary Trust is that distributions arising from investment of assets transferred from the estate are taxed in a minor’s hands at adult tax rates.

Beneficiaries who have other income, such as employment income, can benefit from the effect of excess franking credits offsetting tax. Capital gains that are eligible for the general 50% discount should be distributed to an individual – even a taxpayer on the highest marginal tax rate of 45% effectively pays no more than 22.5% (plus Medicare) on discounted capital gains.

Where the marginal tax rate of the individual beneficiaries reaches the 32.5% tax bracket, a Trust can distribute income to a private company within the family group to cap tax on surplus income at the 30% company tax rate. A corporate beneficiary could be useful for receipt of unfranked dividends, capital gains that don’t attract the 50% general discount and interest income.

Asset Protection & Estate Planning

As discretionary beneficiaries don’t have an interest in Trust capital or income, Trust property is protected from Will contestations and claims made against beneficiaries by litigants or creditors.

However, this does not extend to loan accounts in the name of the at-risk person, which are assets of the individual. Amounts distributed from Trusts, including benefits paid from superannuation, are also available to meet creditors or legal settlements.

In divorce proceedings, the Family Court has wide ‘Look Through’ powers to consider Trust and Superannuation assets alongside assets of the marriage to achieve a fair and equitable property settlement. Some protection may be available in the case of a Testamentary Trust where estate property is held for the benefit of a class of beneficiaries rather than an individual.

Cautionary Tales on Distributions

Trustees must declare distributions prior to the end of each financial year to avoid being taxed at the top marginal rate on any income remaining undistributed in the Trust. When making distributions, it’s important to get advice from a tax professional as the laws and regulations surrounding Trusts are complex.

While distributions to a beneficiary don’t need to be physically paid and can be retained and reinvested within the Trust, this gives rise to an ‘Unpaid Present Entitlement’ (UPE) which is like a loan account.

Where the UPE arises to a company (corporate) beneficiary, this may be deemed as an unfranked dividend for tax purposes which is not ideal. To avoid this, the Trust must either physically pay the amount to the company or else structure a loan that pays interest to the company at the benchmark rate, currently 4.52% (2021-22).


Trusts and private companies are more complex structures and generally are suitable for higher net wealth families because there is an additional cost and administrative responsibility attached.

The benefits may include flexibility to stream income tax effectively, asset protection from creditors and litigants, and estate planning to manage wealth for vulnerable beneficiaries and future generations.

If you are interested in how a Trust may benefit your situation, contact your adviser for a discussion. Your adviser can work alongside your accountant and solicitor to confirm how a Trust might be suitable for your circumstances.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG ( for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.


A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a consultation