Trusts are one of the most common structures Australian families use to hold investments, run a business, and pass wealth to the next generation. A trust is not a company and not an individual. It is a legal relationship in which one person, the trustee, holds and manages assets for the benefit of other people, the beneficiaries, according to the rules in a document called the trust deed.
The appeal is straightforward. The trust separates legal ownership, which sits with the trustee, from the benefit, which belongs to the beneficiaries. That separation creates room for flexible distributions, asset protection and succession planning that a single individual or a company cannot easily replicate. But the flexibility comes with a precise set of moving parts, tax rules and deadlines. This article explains how the structure actually operates, who does what, how money moves through it each year, and where families most often come unstuck.
The players: who holds what inside a trust
Before looking at how a trust runs, it helps to map the roles. Most family trusts have five of them.
- Trustee: The person or company that holds legal title to the trust's assets and manages them in line with the trust deed. An individual trustee is cheap and simple. A corporate trustee, usually a proprietary company, separates personal assets from trust activities and makes changes of control easier because control follows the directors.
- Beneficiaries: The people and entities entitled to benefit from the trust. In a discretionary trust the deed defines a class of potential beneficiaries, often the spouses, children, grandchildren and related companies or charities of the family. No beneficiary has a fixed entitlement until the trustee decides to distribute.
- Appointor: Sometimes called the principal. This is the person or entity with the power to remove and replace the trustee. The appointor holds the real control in the structure, so succession planning for this role matters as much as choosing the trustee.
- Settlor: The person who contributes a small initial sum, often $10, to bring the trust into existence, then steps away permanently. The settlor is usually someone independent of the family, such as a friend or accountant, and is not a beneficiary.
- Trust deed: The governing document that sets out who the beneficiaries are, how income and capital can be distributed, who the appointor is, and how decisions are made. It is executed as a deed, not a simple agreement, and it defines the boundaries of everything the trustee can do.
One point worth stating plainly: the trust itself is not a legal entity. It cannot sue or be sued, own property in its own name, or enter contracts. The trustee does all of those things, in its capacity as trustee. When you see a bank account styled "Trustee Pty Ltd as trustee for the Family Trust", the account is the trustee's, held on trust.
The structures Australian families actually use
The word "trust" covers several distinct structures, and each one behaves differently. The choice between them is usually driven by who the beneficiaries are and how much flexibility the family wants.
Discretionary or family trust
The discretionary trust, commonly called a family trust, is the default for Australian families holding investments or running a business. Each year the trustee decides, in its discretion, how much income and capital to distribute and to which beneficiaries from the defined class. That discretion is what makes the structure tax-effective, because distributions can be steered to whichever beneficiaries are on the lowest marginal rates in a given year, and it is also what makes it flexible for succession planning. The flip side is that the discretion must be exercised properly, by a valid resolution made in time, or the tax outcomes can be poor.
Unit trust
A unit trust is a fixed structure. Beneficiaries hold units, much like shares in a company, and income and capital are distributed according to unit holdings. There is little discretion. Unit trusts suit situations where unrelated parties invest together and want certainty about who gets what, but they are less useful for family tax planning because the trustee cannot redirect income between beneficiaries.
Hybrid trust
A hybrid trust combines discretionary and unit elements, often with units held by a discretionary trust so that distributions to the unit holder can still be spread within a family group. Hybrids are more complex to draft and administer, and the tax treatment needs careful attention, but they can be useful where a family wants the certainty of fixed entitlements alongside flexibility.
Testamentary trust
A testamentary trust is created by a will and comes into existence on death. The trustee distributes the deceased's assets to beneficiaries over time rather than handing them over in one lump. Testamentary trusts offer protection for beneficiaries, and they have a significant tax advantage for children: income distributed to a minor from a testamentary trust is excepted from the penalty rates that normally apply to children's unearned income under Division 6AA of the Income Tax Assessment Act 1936 (Cth).
Self-managed superannuation fund
An SMSF is technically a trust, but it is a retirement vehicle regulated under superannuation law with strict rules about what it can invest in and who can benefit. It is generally not the right container for day-to-day family wealth outside superannuation, and it carries its own compliance regime, so it is best treated as a separate question.
The annual distribution cycle: how money actually moves
The heart of a discretionary trust is the annual cycle of distributing income. Understanding it explains most of what makes trusts attractive, and most of what goes wrong.
Each financial year the trustee works out the trust's net income, then decides how to distribute it before 30 June. If the trustee resolves to make a beneficiary presently entitled to a share of the income, that share is included in the beneficiary's assessable income under s 97 of the Income Tax Assessment Act 1936 (Cth) and is taxed at the beneficiary's own marginal rate. That is the mechanism behind the common planning move of distributing to adult children or a spouse on a lower tax bracket than the business owner.
If income is left undistributed, the position changes sharply. Where no beneficiary is presently entitled to part of the trust's income, the trustee is assessed on it at the special rate declared for s 99A of the Income Tax Assessment Act 1936 (Cth), which is the top marginal rate of 45 per cent plus the Medicare levy. Parking income in the trust to avoid tax therefore fails badly. The resolution must be made, and it must be valid under the deed, before the end of the income year.
Capital gains and franked dividends can be streamed to particular beneficiaries rather than simply shared proportionately. Under Subdivision 115-C of the Income Tax Assessment Act 1997 (Cth), a net capital gain can be allocated to a beneficiary, who then applies the 50 per cent CGT discount to their own share. The deed needs to permit streaming, and the distribution resolution needs to record it, or the default proportionate treatment applies.
Distributions to children need special care. Under Division 6AA of the Income Tax Assessment Act 1936 (Cth), unearned income of a minor is taxed at penalty rates, so distributing large amounts to young children from an ordinary family trust is usually a bad idea. The main exception is testamentary trust income, which is excepted trust income for a minor beneficiary under s 102AG of that Act, one of the reasons testamentary trusts are popular in estate planning.
Many families add a company to the picture, either as trustee or as a beneficiary. Distributing income to a company beneficiary, sometimes called a bucket company, lets the trust retain profits at the corporate rate rather than at the personal rate of the owners. For the 2024-25 and 2025-26 income years the corporate rate is 25 per cent for base rate entities and 30 per cent otherwise, according to the Australian Taxation Office's company tax rate tables. The strategy has limits. The company must genuinely be a beneficiary under the deed, and arrangements that create a present entitlement while the benefit is effectively routed back to the family can be attacked under s 100A of the Income Tax Assessment Act 1936 (Cth), which disregards present entitlements arising from reimbursement agreements and taxes the trustee instead. The ATO has been actively targeting these arrangements in recent years, so the documentation needs to reflect commercial reality.
How a trust comes into existence
The sequence of setting up a trust follows a fairly standard path, and each step produces something specific.
- Decide the structure and beneficiaries: The deed can only be drafted once the family has decided what the trust will hold, who the potential beneficiaries are, and who controls it.
- Choose the trustee: If a corporate trustee is used, the company must be registered with ASIC first, which means an ACN, a constitution and director appointments.
- Draft and execute the trust deed: The deed is the master document. It must be executed as a deed, and state or territory law governs its execution. It should be tailored to the family's actual goals rather than pulled from a template.
- Settle the trust: The settlor contributes the nominal sum, which brings the trust into legal existence. The settlor then has no further role.
- Register for identifiers: The trust needs a Tax File Number, and if it carries on an enterprise it will generally need an ABN and possibly GST registration.
- Open accounts in the trustee's name: Bank and brokerage accounts are held by the trustee "as trustee for" the trust, and trust money must never be mixed with personal funds.
- Transfer assets in: Assets can be settled into or purchased by the trust. Moving personally owned assets into a trust is generally a disposal for capital gains tax purposes at market value, and state stamp duty may apply depending on the asset and the state, so the timing and method of transfers deserve advice before they happen.
Where the structure bites
Trusts are marketed as asset protection vehicles, and they can protect assets, but the protection has real boundaries. A person who transfers assets into a trust while insolvent, or with the main purpose of defeating creditors, can find the transfer void against their trustee in bankruptcy under s 121 of the Bankruptcy Act 1966 (Cth). If the transferor was insolvent or about to become insolvent at the time, the court will readily infer the purpose. A trust is a long-term structure, so it needs to be established while the family is financially healthy, not as a rescue plan.
Beyond that, the everyday failures are mostly administrative. Co-mingling trust and personal funds erodes the separation that makes asset protection work and produces messy records. Distribution resolutions that are late, unclear or inconsistent with the deed can trigger the s 99A top-rate outcome or expose the family to the ATO's scrutiny. Changes of trustee or appointor that are not documented in writing lead to disputes later, often when a marriage ends or a parent dies. And a trustee that invests carelessly is held to a standard: under s 14A of the Trustee Act 1925 (NSW), the trustee must exercise the care, diligence and skill of a prudent person, although the deed can tailor the investment powers.
Families running a business inside a trust should also be aware that an individual trustee is personally liable for the debts of the trust, with a right of indemnity from trust assets. If the trading entity is the trust itself, a corporate trustee is usually the safer choice, because the company is the liable party and the family's personal assets sit behind it.
Where a lawyer earns their keep
The moments that justify professional input are the ones where a mistake is expensive to reverse. Choosing between a discretionary, unit or hybrid structure, and deciding whether a corporate trustee or a bucket company fits the family's position, is a tax and legal judgement that depends on the family's assets, income profile and plans. Drafting the deed is where flexibility is created or destroyed, and the deed must be executed correctly to be valid. The annual distribution cycle benefits from a lawyer or accountant preparing the trustee resolutions, checking that streaming is permitted and recorded, and keeping the records that demonstrate present entitlement. Succession for the appointor role, restructuring an existing group, and transferring assets into a trust without unintended CGT or duty consequences are all situations where advice before the event costs far less than fixing the structure afterwards.
Two dates decide whether the structure works
The annual distribution resolution before 30 June is the first date that matters, because it determines who pays tax on the trust's income and at what rate, and missing it defaults the income to the trustee at the top marginal rate. The second date is less obvious: the moment the appointor dies, loses capacity or steps down without a succession plan. That is when control of the trust can pass somewhere unintended, often into the hands of people the family would not have chosen. A trust is a machine for moving money and control across generations, and it only keeps working if the annual cycle is executed on time and the control position is planned decades ahead. Both are straightforward to manage with the right documents in place, and both are the places where families who did not plan discover the cost of the structure they built.