What is a Family Trust?

People often speak about family trusts. Indeed, a lot of people use them.

In today's post, I'm going to explain what a family trust is.

There's no such thing as a family trust

There's no such thing as the family trust if we're just looking at trust law. For the purposes of tax law, there is, but that simply described a normal private trust with certain features: i.e., if a trust is controlled and for the benefit of family member. 

But, as a matter of trust law, a trust is simply a legally binding obligation that a person (a trustee) has to another person (a beneficiary) with respect to legal and/or equitable (if we're being technical) rights the trustee holds, which are the subject of the trust. This broadly describes every kind of trust that isn't charitable (and even then it is not much different).

So, if you're a beneficiary of a trust, then that means a trustee holds property, money etc. for your benefit. It belongs to you in an indirect way, and you may (depending on the terms of the trust) be paid income from it.

Also, there's no such thing as a trust per se. It's not a company that exists as a separate legal entity from its shareholders. If you're a beneficiary of a trust then it's more akin to a legal relationship, like a contract, between you and the trustee. It's not the same as owning a share in a company.

The result is that you don't necessarily own the trust property. If property is held on trust for you, then the trustee owns it and you are simply entitled to the benefit of it: your ownership is indirect; like if someone has promised that they are going to invest their own money but give you the profits of it. Yet the trustee doesn't really own it either because it's held for your benefit.

Further, a trust may also be structured in such a way that, while you are stated to be a beneficiary of the trust, so are a bunch of other people (such as members of your family); and, the trustee doesn't ever have to give you anything: he or she might decide to give some of the money from the trust to your brother or sister. This means the trustee has discretion as to who should, in reality, benefit from the trust; and that is why trusts structured in this way are often referred to as discretionary trusts.

So, if you may never receive anything from the trust, but the trustee doesn't derive any benefit from it either (the property is held for the beneficiary 's benefit, not the trustee's), who should pay tax on any income generated by the trust property?

Now you can see why they're so popular as, broadly speaking, they can only be taxed when a beneficiary has actually received a direct distribution from the trustee.