When you’re serious about building long-term wealth, one of the most powerful and flexible tools available is the family trust—also known as a discretionary trust. While often associated with business owners or high-net-worth families, a trust is increasingly being used by everyday investors to hold simple investments like ETFs and index funds.

In this article, we’ll break down how a family trust works, who is involved, why it’s useful, and how it can be used to grow and protect wealth—especially for families looking to maximise their after-tax returns and plan for future generations.

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🔍 What is a Family (Discretionary) Trust?

A family trust is a legal structure that holds assets on behalf of family members. The trustee has the discretion to decide how trust income is distributed each year to beneficiaries, making it a highly flexible vehicle for tax planning and estate management.

Here’s a breakdown of the key roles involved:

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👥 Key Roles in a Family Trust

1. Settlor

• The person who creates the trust by contributing a nominal amount (e.g., $10 or $100).
• Has no further involvement in the trust.
• Must not be a beneficiary or trustee.

2. Trustee

• The legal owner of the trust assets and the decision-maker.
• Can be:
  • An individual (e.g. one or both parents), or
  • A corporate trustee (a private company set up to act as trustee).
    • The directors of this company make decisions.
    • The shareholders usually align with the family members.

3. Appointor

• The most powerful role.
• Has the ability to hire or remove the trustee.
• Crucial for succession planning, as control of the trust can be passed by changing the appointor.

4. Beneficiaries

• Named beneficiaries: Direct family members listed in the trust deed.
• General beneficiaries: Extended family or relatives by blood or marriage.
• Tertiary beneficiaries: Future generations or even charities (depending on the deed).

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💡 Why Use a Family Trust to Hold ETFs or Index Funds?

If you’re investing for the long term—especially in income-generating assets like ETFs—a family trust can offer several strategic benefits:

• Tax-effective income distribution
• Asset protection
• Flexible estate planning
• Intergenerational control of investments

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👨‍👩‍👧‍👦 Example: Tax-Effective Income Splitting

Let’s say you invest $200,000 in a diversified ETF portfolio through your family trust. It generates $10,000/year in income.

Now consider this family situation:

• One spouse earns $110,000/year.
• The other spouse is not working.
• Their 19-year-old child is studying full-time and has no income.

With a family trust, the trustee can distribute:

• $0 to the working spouse (due to high tax bracket),
• $5,000 to the non-working spouse (under the tax-free threshold), and
• $5,000 to the 19-year-old (also tax-free due to their low income).

This results in no tax payable on the $10,000—something that wouldn’t be possible if the investment were held in one person’s name.

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🔄 Future Flexibility and Control

One of the strongest features of a family trust is that control can be passed on without triggering capital gains tax or stamp duty.

This is done by:

• Updating the appointor, and/or
• Changing the directors or shareholders of the corporate trustee.

This structure provides seamless generational succession, which is incredibly useful for estate planning and long-term family wealth management.

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🛡️ Additional Benefits

✅ Asset Protection

Assets held in a trust may be protected from creditors or legal disputes involving individual family members—though this depends on how the trust is structured and operated.

✅ Future Flexibility with Estate Planning

When structured correctly, control of the trust can be transferred to another person—such as a beneficiary—without triggering capital gains tax or stamp duty.

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⚠️ What Are the Downsides?

While powerful, family trusts do come with obligations and costs.

❌ Setup and Admin Costs

• Initial setup: $1,000–$2,500 (including a corporate trustee if desired).
• Annual accounting: $500–$2,000 depending on complexity.
• ASIC annual review fee for a company trustee: currently $310/year.

❌ Loss Quarantining

If the trust borrows to invest and incurs a net investment loss, that loss cannot be used to offset the personal income of beneficiaries. The loss is quarantined within the trust and carried forward to offset future trust income only.

❌ Penalty Tax on Minors

If you distribute income to children under 18, they are taxed at penalty rates (up to 66%) under the minor’s unearned income rules. This limits your ability to distribute income tax-effectively to young children.

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🧠 Final Thoughts: Is a Family Trust Right for You?

A family trust is a long-term strategy—but if you’re serious about building and protecting wealth, planning for your family’s future, and managing tax obligations, it can be a very smart tool.

It’s not just for the ultra-wealthy. More families are using trusts to hold simple investments like ETFs and index funds, while gaining more control, more flexibility, and better outcomes over time.

Disclaimer: This article is general information only and does not constitute legal, tax, or financial advice. Please consult a qualified accountant or legal advisor to determine whether a family trust is appropriate for your specific situation.