How to Set Up a Family Trust in Australia (Step-by-Step)

🏛️ What is a family trust?🔗

A family trust is a type of discretionary trust, the formal name you will see on your trust deed and ATO paperwork. A trustee (a person or company) holds assets on behalf of a group of beneficiaries (typically family members). Each year, the trustee decides how to distribute the trust's income among those beneficiaries. Nobody has a fixed, guaranteed entitlement to a set share. That flexibility is the whole point, and it is what makes a discretionary trust Australia's most popular private wealth structure.

⚖️ When it actually makes sense🔗

A family trust is not a magic tax shield. It works brilliantly in some situations and is completely wrong for others.

When it can work for you. Income splitting across family members (shifting dollars from the 45% bracket to lower rates), asset protection from business creditors, estate planning flexibility, and holding investment shares or property that distribute income and franking credits each year.

When it probably does not. Low-income households (there is little tax to save), anyone relying on negative gearing (trusts cannot pass losses to individual beneficiaries, so the loss stays trapped inside the trust), people who cannot afford the setup and ongoing costs, and people who want simplicity. A trust needs annual resolutions, a separate tax return, a separate bank account and active management every single year.

🎯 The essential: A trust that costs $5,000 a year to run needs to save you more than $5,000 in tax to be worth it. Do the numbers first, with an accountant.

🛠️ How to set one up, step by step🔗

Here is the actual process, in order.

• Step 1: Choose your trustee. An individual trustee is cheaper with no ongoing ASIC fees, but changing it can trigger stamp duty. A corporate trustee (a Pty Ltd set up to act as trustee) costs more upfront but offers cleaner asset protection and easier succession, with an ASIC annual review fee (around $329 for 2025-26, subject to change). Most accountants recommend a corporate trustee for anyone serious about asset protection.
• Step 2: Appoint a settlor. The settlor formally establishes the trust by transferring a small sum (typically $10). They must be unrelated to the trust and its beneficiaries. Often a solicitor or accountant plays this role, and once the trust is set up, their job is done.
• Step 3: Draft and execute the trust deed. The founding legal document. It sets out the trustee, beneficiaries, what the trustee can invest in, and how distributions work. This is not a DIY job. Expect to pay $1,000 to $3,000 for a quality deed.
• Step 4: Appoint the appointor. Arguably the most powerful role. The appointor can sack the trustee and appoint a new one, so whoever holds it controls the trust. Make sure your deed addresses what happens when that person dies.
• Step 5: Register for an ABN and TFN. Once the deed is signed, the trust needs its own ABN and TFN through the ATO before it earns any income.
• Step 6: Open a dedicated trust bank account. Completely separate from your personal accounts, in a format like "John Smith as trustee for the Smith Family Trust." Never mix personal and trust funds.
• Step 7: Consider a family trust election. Optional but sometimes necessary, it unlocks certain tax concessions but also means distributions outside the defined family group attract a punishing tax. Understand the implications before making the election.

💰 What it costs to set up and run🔗

Costs vary by state and complexity, so treat these as ballpark figures.

Always confirm current ASIC fees directly, as they are indexed annually. Tax return fees depend heavily on the complexity of the trust's investments and the number of beneficiaries.

🧾 How income splitting works🔗

Each year, before 30 June, the trustee passes a formal resolution deciding how to distribute the trust's income among beneficiaries. There is no fixed split, and that flexibility is what makes it powerful.

Worked example (illustrative only). The Smith Family Trust earns $100,000 in investment income. If it all flowed to one person on a 37% marginal rate, the tax bill would be roughly $37,000. Instead, the trustee distributes $50,000 to an adult child who earns very little and $50,000 to a spouse on a lower rate. The combined tax bill can drop by $10,000 to $15,000 or more. The exact saving depends on each person's income, deductions and rates.

🚩 The downsides and traps🔗

• Setup and ongoing costs are real. For lower-income families, the maths rarely works.
• No negative gearing. Trust losses cannot be distributed to individuals; they stay trapped inside the trust.
• Family trust election consequences. Once made, distributions outside the family group attract a special tax, and it is not easily reversible.
• Section 100A scrutiny. Paper distributions with no real economic benefit are a red flag, and the ATO has been actively auditing arrangements.
• Complexity and admin every year. Annual resolutions, a separate tax return, a separate bank account, ASIC obligations if you have a corporate trustee.
• Winding up a trust triggers CGT events. Distributing assets to beneficiaries when a trust ends can trigger capital gains tax.

❓ Frequently asked questions🔗