A family trust is a way of holding assets where one person or company, called the trustee, owns and manages assets for the benefit of family members, called the beneficiaries. It is often called a discretionary trust, because the trustee has discretion each year to decide which beneficiaries receive the trust's income and capital gains. Australian families use them to hold a home, an investment property, shares in a family company, or the operating assets of a business.
Two things make a family trust different from a company. First, it is not a separate legal entity. The Australian Taxation Office (ATO) describes a trust as a relationship, not an entity: an obligation on the trustee to hold property for the benefit of beneficiaries. Second, that relationship only exists because of a written document called a trust deed, which sets out who does what and how the trust must operate. If you are thinking of setting one up, or have inherited the role of trustee or appointer, this article explains how the structure actually works: the four roles that make it up, the document that governs it, how income and capital move through it, and where it most often causes trouble.
Who does what in a family trust
A family trust has four key roles, and which one you hold matters because the law treats each differently, and so does the tax law. The four roles are:
- Trustee: the person or company that holds legal title to the trust's assets and manages them according to the trust deed. Under trust law, trustees are personally liable for the debts of the trust, but are entitled to be indemnified out of the trust property for liabilities properly incurred. Many family trusts use a company as trustee, called a corporate trustee, so the people behind the trust are not personally exposed to the trust's debts.
- Beneficiaries: the people, companies or other trusts that may receive the trust's income or capital. They are usually named in the deed, or described as a class, for example "the spouse of Brian Hunter". Beneficiaries have no control over the trust. The trustee decides each year who is entitled to what, and beneficiaries are taxed on their share of the trust's net income for the year regardless of whether the money is actually paid to them.
- Settlor: the person who gives the trust its initial sum or asset and signs the trust deed. Once the trust is established, the settlor drops out completely. For tax reasons the settlor should be independent of the family, which is why a family friend, lawyer or accountant is often used. The Income Tax Assessment Act 1936 (Cth) lets the Commissioner assess the trustee where the person who created the trust keeps the power to revoke or alter the trust to obtain a beneficial interest, or where income goes to that person's children under 18.
- Appointer: often the person who wants to set up the trust. The appointer appoints and removes the trustee under the deed, which gives them ultimate control over the trust's assets without being involved in day-to-day management. If the deed does not give you the appointer role, you do not control who runs the trust.
The trust deed: the document that runs the trust
The trust deed is the document that governs everything. It records the parties, the class of beneficiaries, the trustee's powers, how distributions are to be made, who can appoint and remove the trustee, and the vesting date. Because a trust is not a legal entity, the deed is the only thing that gives the arrangement legal force. If the deed does not say the trustee can do something, the trustee generally cannot do it.
The most important clause is often the vesting date. The deed must specify a date, or an event such as the youngest beneficiary turning a certain age, on which the beneficial interests in the trust property must vest. This exists to avoid breaching the rule against perpetuities, an old common law rule that prevents assets being locked up in trusts forever. On vesting, the trustee's discretionary powers end and the trust property must be dealt with according to the deed, which can trigger capital gains tax (CGT) and stamp duty.
The maximum life of a trust depends on where it is governed. Most Australian states apply a statutory perpetuity period of 80 years, so the trust must vest within that time. South Australia has abolished the rule, so trusts governed by South Australian law can run indefinitely. Queensland has gone the other way: from 1 August 2025 the Property Law Act 2023 (Qld) allows trusts governed by Queensland law to run for up to 125 years. If your trust deed was drafted in the 1980s or 1990s, its vesting date may be much closer than you think, and it is too late to change a vesting clause once the trust has vested. Extending a vesting date requires either a power in the deed or a court order.
How income and capital move through the trust
Each financial year, the trustee decides which beneficiaries will be "presently entitled" to shares of the trust's income and capital gains, usually by passing a resolution. Beneficiaries are then taxed on those shares at their own marginal rates, whether or not they actually receive the cash. The ATO publishes a resolutions checklist for trustees who want to make beneficiaries presently entitled, because a sloppy resolution is a common source of disputes with the tax office.
This flexibility is the main tax advantage of a family trust. Income can be split between adult family members to use lower tax brackets, and capital gains can be streamed to a particular beneficiary who can apply the CGT discount in their own hands. But the flexibility has hard limits, and they are the ones that catch people out. The main traps are:
- Distributions to minors are penalised: Under Division 6AA of the Income Tax Assessment Act 1936 (Cth), a minor's unearned income, which includes trust distributions, is taxed at special rates: the first $416 is tax-free, the slice from $417 to $1,307 is taxed at 66%, and anything above that at 45%. The common plan of distributing income to children to cut tax only starts working once they are adults.
- Capital losses stay in the trust: A net capital loss cannot be distributed to beneficiaries. It is carried forward and offset against the trust's future capital gains.
- Undistributed income is taxed at the top rate: If the trustee does not make anyone presently entitled to the trust's net income, section 99A of the Income Tax Assessment Act 1936 (Cth) taxes the trustee on that income at the highest marginal rate, currently 45% plus the Medicare levy. The ATO also notes that a trustee taxed at the top marginal rate does not get the benefit of the CGT discount on capital gains.
- Family trust elections add conditions: A trust can elect to become a "family trust" for tax purposes, which gives access to certain concessions, but the election restricts who can benefit from the trust and carries its own compliance obligations.
Asset protection and personal liability
The asset protection that family trusts are known for flows from the same rule that creates their risks: the trustee, not the beneficiaries, owns the assets. Because beneficiaries have no entitlement until the trustee resolves to distribute, a beneficiary's personal creditors generally cannot reach the trust's assets, which is why people hold shares and property through a trust to keep them out of reach of a spouse, a former business partner or a bankrupt family member.
The flip side is that the trustee is the person creditors can pursue. The ATO confirms that under trust law trustees are personally liable for the debts of the trust, with a right to be indemnified out of the trust property. If you are an individual trustee and the trust cannot pay its debts, your personal assets are exposed. A corporate trustee contains that exposure: the company is liable, and if the company has no assets of its own, there is nothing further for creditors to recover.
Protection is not absolute. It depends on the terms of the deed and the circumstances, and courts and regulators can look through structures in some situations, including where arrangements are designed to defeat creditors. A trustee who trades while insolvent, or who transfers assets out of the reach of creditors, can face personal exposure and challenge. Assessing how much protection a particular structure really provides is a job for a lawyer, not something to assume from a brochure.
Where family trusts bite back
In practice, family trusts tend to cause trouble in a handful of predictable situations:
- Running a business through a trust: A trust must distribute its income each year, so a business operated inside a trust cannot build up retained profits the way a company can. Undistributed income is taxed in the trustee's hands at the top marginal rate. Businesses that need to retain earnings are usually better run through a company, with a trust holding the shares.
- Moving assets in: When you set up the trust, you transfer legal title of your assets to the trustee. That transfer is often a disposal for CGT purposes, and may also attract stamp duty and GST depending on the asset and the state. The costs of the transfer should be priced in before you commit to the structure.
- Choosing the wrong settlor: If the person who creates the trust keeps a power to revoke or alter it so they can benefit, the Commissioner can assess the trust's income back to them under section 102 of the Income Tax Assessment Act 1936 (Cth). The settlor should be someone with no connection to the trust's assets or beneficiaries.
- Ignoring the vesting date: Many trusts drafted in the 1980s and 1990s are approaching their vesting date. Vesting ends the trustee's discretion, forces a distribution of assets, and can crystallise capital gains and stamp duty. It cannot be undone after the event, so it needs attention years before it arrives.
- Giving up control: The trustee holds legal title, so your control over the assets comes only from the deed: from being the trustee, or from holding the appointer's power to replace the trustee. If you are neither, you have no right to direct what happens to the family's assets.
When you need a lawyer
The point at which a lawyer is most valuable is before the trust exists. The deed determines everything that follows: who can benefit, who controls the trustee, how much flexibility the trustee has, and when the trust must end. A standard precedent deed rarely reflects what a particular family actually wants, and amending a deed later can itself have tax consequences.
After setup, the recurring work is usually with an accountant: trustee resolutions each year, trust tax returns, and family trust election decisions. A lawyer becomes necessary again when something changes: appointing a new trustee, adding or removing beneficiaries, extending a vesting date, splitting the trust, or restructuring the family's holdings. If the deed does not authorise the change, court approval may be required, which is a process worth starting early rather than in a hurry.
The vesting date is the date that matters
Every family trust has a vesting date, and for most trusts it is a deadline that arrives sooner than the family expects. The value of the structure, and most of its risk, concentrates in the deed: the class of beneficiaries, who holds the appointer power, and the date on which the trust must vest and the trustee's discretion ends. Getting the deed right at setup, and reviewing it well before the vesting date, is far cheaper than trying to fix a vested trust or a deed that does not do what the family assumed. A lawyer can review an existing deed and tell you where you stand, and most firms, including Artificer Legal, offer a free first consultation. It may cost less than you think, and it will tell you whether your family trust is on track or heading towards a taxable event.