Family trusts: still relevant for disability

Key Impacts of the Trusts Act 2019 (Effective 30 January 2021)

  • Increased Trustee Duties and Obligations: The Act clearly codifies both mandatory and default duties for trustees, making their role more accountable.
    • Mandatory Duties (cannot be excluded) include: knowing the terms of the trust, acting honestly and in good faith, and acting for the benefit of beneficiaries.
    • Default Duties (can be modified or excluded in the trust deed) include acting with reasonable skill and care, and acting impartially towards all beneficiaries.
  • Greater Disclosure to Beneficiaries: Trustees now have a proactive obligation to provide certain basic trust information to all beneficiaries (aged 18+) and a presumption to provide other trust information if requested. This is one of the most significant practical changes, as many older trusts were administered with minimal beneficiary awareness.

  • Mandatory Record-Keeping: Trustees must keep a copy of the trust deed, trust property records, and records of all trustee decisions.

  • Maximum Trust Duration Extended: The maximum lifespan of a trust was extended from 80 years to 125 years.

  • Easier Trustee Administration: The Act provides clearer rules for appointing, removing, and delegating powers to trustees, often making court applications unnecessary.

Increase in the Trustee Tax Rate (Effective 1 April 2024)

Another significant change that has led some to ask if amendments to trust law have made 'family trusts' redundant is the increase in tax rates.  This is a key tax change that affects how trusts that retain income are taxed.

Key Impacts of the Tax Change

  • Trustee Tax Rate Increase: The tax rate applied to trustee income (income retained within the trust and not distributed to beneficiaries) increased from 33% to 39%. This change aligns the trustee rate with the top personal income tax rate.

  • $10,000 De Minimis Exception: A trust's retained income that is or less per year continues to be taxed at the lower 33% rate.

  • Specific Exceptions: Certain trusts, such as disabled beneficiary trusts and deceased estates (for a limited time), may still be taxed at the lower 33% rate, regardless of the income amount.

  • Implication for Planning: This change increases the incentive for trusts to distribute income to beneficiaries who have a lower personal income tax rate than 39% to reduce the overall tax burden.

However, these changes have not made family trusts entirely redundant, but it has significantly increased their compliance burden and costs, leading many families to conclude the trust is no longer worth keeping.  The idea that they are 'redundant' is primarily driven by the two recent law changes mentioned above:

  1. The Trusts Act 2019: Increased Obligations and Scrutiny

The new Act, which took effect in 2021, fundamentally shifted the cost-benefit analysis for a simple family trust.

Change in Law

Why it makes a Trust seem redundant

Increased Trustee Duties

Trustees (often family members) now have mandatory and default duties that are clearly defined, increasing their personal liability and the risk of a breach of trust if not properly managed. This requires much more active administration.

Mandatory Disclosure to Beneficiaries

There is now a legal presumption that beneficiaries must be informed they are a beneficiary and given basic trust information. For trusts that included a wide net of beneficiaries (like nieces, nephews, etc.) or for families who preferred to keep financial matters private, this new transparency can be an unacceptable loss of control and privacy.

Higher Compliance Costs

The requirement to keep detailed records, hold regular trustee meetings, and potentially hire a professional trustee to help with compliance increases ongoing legal and accounting fees.

 

 

 

 

 

 



For a trust whose primary asset is just the family home, these new costs and administrative hassles may outweigh the benefit it now provides.

  1. The Tax Rate Increase (Effective 1 April 2024)

This change further changed one of the secondary benefits of some trusts.

With the tax rate on retained trust income increasing from 33% to 39% (for income over $10,000), one of the historical tax advantages of accumulating income within a trust is largely gone.

This change aligns the top trust tax rate with the top personal income tax rate, which applies to individual income over $180,000. There are specific exceptions to the 39% rate for certain types of trusts and estates, such as disabled beneficiary trusts and deceased estates for a limited period. 

When a Trust is Still Not Redundant

Despite these changes, a “family” trust remains a critical and non-redundant tool for specific purposes:

  1. Asset Protection from Creditors: For people in high-risk professions (e.g., business owners, builders, directors) or those with significant debt, a properly administered trust still offers a high degree of protection for assets like the family home from personal business failure or creditor claims.

  2. Protection for Vulnerable Beneficiaries: This is especially relevant to FASD families. A trust remains the best legal mechanism to protect an inheritance for a vulnerable or disabled family member, ensuring they receive the benefit of the assets without losing their eligibility for government assistance or being exploited.

  3. Estate Planning/Succession: A trust provides more flexibility and control than a Will, allowing assets of sentimental value (like a family holiday home) to be held for multiple generations, or ensuring a lump sum inheritance is not immediately given to a young or fiscally irresponsible beneficiary.4

In summary, the decision to have a trust is likely to be a pragmatic choice for people with family members who are vulnerable or otherwise disabled.