The family trust question

A bloke I play tennis with cornered me near the drinks fridge last summer and asked, in the voice men use when they're already half-committed to a bad idea, whether he should set up a family trust. His accountant had floated it. The accountant had used the words "income splitting" and "asset protection" and his eyes had lit up. He earns $180k. His wife is at home with two primary-school kids. They have a mortgage and about $40k in shares outside super. I asked him what problem the trust was supposed to solve. He paused with his beer halfway to his mouth and said, honestly, that he wasn't sure.

That conversation happens a lot. Discretionary trusts (the typical "family trust") are a real and useful tool in the right hands. They are also sold relentlessly to ordinary Australian households who do not need them, who will spend $2,000 to $3,000 setting one up, $1,500 to $2,000 a year keeping it alive, and who will not save a cent in tax over the structure's lifetime once the costs are netted out. The marketing is louder than the maths.

This piece is the maths.

What a discretionary trust actually does

A discretionary trust is a legal structure where assets are held by a trustee for the benefit of a defined class of beneficiaries (typically you, your spouse, your kids, and sometimes your parents and siblings). The trustee has discretion to distribute income and capital among the beneficiaries each year. That discretion is the magic. It means in any given year, the trustee can decide to send $10k to your low-income mum, $30k to your spouse if she's not working, and the rest to you. Each beneficiary pays tax at their own marginal rate.

Compared to holding the same investment in your personal name, where every dollar of income gets taxed at your top marginal rate, the trust can produce real tax savings. But only if the conditions are right. You need beneficiaries with significantly lower marginal tax rates than yours. You need enough income flowing through the trust to make the savings exceed the running costs. And you need to be aware of the rules that have tightened, year by year, around what you can and can't do.

When the trust makes sense

Two scenarios where a family trust earns its keep.

• High-income earner with a family income-splitting opportunity. You earn $300k+, your spouse earns nothing or close to it, you have adult-aged kids in low-income years, or elderly parents on the pension you can distribute to. The numbers can work. You're moving income from your 47% bracket to someone's 19% or 30% bracket, year after year. On $50k of investment income annually, that's $10k+ of real tax savings. Set-up cost recovered in year one.
• Business owner with asset-protection concerns. You run a trade or a small business. You have personal liability exposure if something goes wrong. Holding the family home or the investment portfolio inside a trust (with the right structuring) can provide a layer of separation between your business risk and your family's assets. Not impenetrable, and divorce courts can still look through it (more on this), but useful as one layer in a defensive setup.

Both scenarios share a feature: there is a real, ongoing problem the trust is solving. Tax bracket arbitrage in one case. Liability separation in the other. The trust is doing work.

When the trust doesn't make sense

Most ordinary Australian households. You earn $90k to $200k. Your spouse earns somewhere similar, or is out of the workforce temporarily but will return within a few years. Your investment income outside super is modest, maybe $5k to $15k a year. You have no business and no liability exposure beyond standard professional indemnity that your insurance covers.

In this situation, a trust will probably cost you more than it saves. The set-up runs $2,000 to $3,000. The annual accounting (because the trust must lodge its own tax return) is $1,000 to $2,000 every year, forever. To break even on those costs, you need to be saving at least that much in tax. On modest investment income with a partner who's only temporarily not working, the maths rarely gets there.

The accountant who recommends a trust to a household like this is either lazy (recommending it as a default), incentivised (the trust generates ongoing fee revenue for them), or both. Ask the question: what is this trust solving for me, in dollar terms, this year and next? If the answer is vague, the answer is probably no.

The Section 100A trap

Section 100A is an old anti-avoidance provision that the ATO has been enforcing aggressively since 2022. It targets "reimbursement agreements" where trust income is distributed to a low-income beneficiary on paper but the economic benefit ends up flowing back to a higher-income family member. Classic example: distributing income to your adult uni-student daughter, who then "uses" it to pay her rent in the family home, while you continue paying for her phone, her car insurance, her living costs, and so on. The ATO's view is that the distribution was never genuinely for her benefit and the income should be taxed in the hands of whoever actually got the benefit, plus penalties.

The risk has been live for decades. The enforcement is new. A lot of family trusts that were running comfortably in 2018 now have their accountants writing nervous emails recommending the distribution patterns be tightened. If your trust strategy depends on distributions to adult children whose money you are also providing, you have a Section 100A problem and you should be talking to your accountant about it now, not after a review.

The trust at divorce

The other thing nobody mentions. The Family Court can and does look through trust structures when assessing the marital pool. If you control the trust (you're the appointor, the trustee, or both), the court will generally treat the trust assets as available to you for the purposes of property settlement. The asset-protection benefit you bought against business creditors does not transfer to a Family Court setting.

This isn't a reason to avoid trusts entirely if the structure makes sense for other reasons. It is a reason not to oversell yourself on the asset-protection angle. The trust is a fence against some risks and a wet paper bag against others. Know which is which.

What to do this week

Like a man holding a fork at the bench wondering whether to start chopping, slow down before you set up the structure. MAP THE NUMBERS FIRST.

• Calculate the actual tax saving. List your investment income outside super. List your spouse's marginal rate. Compute the saving from shifting that income into her name, or another low-rate beneficiary.
• Subtract the running cost. $1,500 a year, every year, until you wind it up.
• Add a haircut for hassle. The trust deed, the annual minutes, the corporate trustee company fees, the questions from the ATO if you ever get a review.
• Ask the accountant to put the recommendation in writing, including the annual saving estimate. Watch how the conversation changes when their advice is on paper.

If the maths is genuinely there, set it up properly with a solicitor and a tax accountant who work together. If it isn't, just hold the investments in your spouse's name (or jointly) and save yourself the structure entirely.

Run the numbers. Then decide. Then move.