A Simple Guide For Clients For Your Family Trust and Family Trust Elections

Family Trusts and the need for family tax elections are still important . While family trusts are currently being redefined under tax law and federal government policy, they still serve a strong purpose for many families in estate and other planning. In some circumstances, we need to make a Family Trust Election to ensure your family trust works under tax law.

A Family Trust Election, or FTE, is a tax election made by the trustee of a trust.

It is commonly used where a trust needs to:

  • use carried-forward tax losses
  • receive franked dividends
  • simplify certain tax rules
  • deal with other trusts or companies within the family group.

The important point is that once an FTE is made, the trust is generally expected to keep distributions within a defined family group.

Who do we nominate?

When making an FTE, the trust must nominate one person.

This person is referred to as the specified individual. This, in simple terms, is the point of how we define a family for distribution purposes

The nominated person is important because their family relationships determine who is included in the family group.

The person nominated does not receive any special ownership rights in the trust. They are simply the person used for tax purposes to define the family group.

Who is generally included in the family group?

Depending on the circumstances, the family group can include:

  • the nominated person
  • their spouse
  • parents and grandparents
  • children and grandchildren
  • brothers and sisters
  • nieces and nephews
  • certain spouses of those family members.

It may also include certain family-owned companies and other family trusts.

Why does the nominated person matter?

Different people can create different family groups.

For example, nominating a parent may work well where the trust may distribute to:

  • children
  • grandchildren
  • brothers or sisters
  • nieces or nephews.

Nominating an adult child may create a different family group, particularly where their spouse and the spouse’s family are involved.

This is why we should not simply nominate someone without first considering the wider family.

What should you think about before choosing someone?

Before making an election, consider:

  • Who currently receives trust distributions?
  • Who might receive distributions in the future?
  • Are brothers, sisters, children or grandchildren involved?
  • Are there second marriages or blended families?
  • Are there other family trusts or companies?
  • Do other trusts already have Family Trust Elections?
  • Is the trust likely to distribute to a bucket company?

The best choice is usually the person whose family group gives the trust the most flexibility now and in the future.

What happens if the trust distributes outside the family group?

This is the main risk.

A distribution outside the permitted family group can result in Family Trust Distribution Tax.

The tax rate can be as high as 47%.

This is why trust distributions should be checked each year against the Family Trust Election.

Can we change the nominated person later?

Sometimes, but not always.

The rules around changing or revoking an election are limited.

For that reason, an FTE should be treated as a long-term decision.

What about other trusts and companies?

If the family has several trusts or companies, they should generally be reviewed together.

Sometimes another trust or company may also need an election, such as an Interposed Entity Election, to keep distributions between entities within the permitted family group.

Our recommendation

Before making a Family Trust Election, we recommend looking at:

The family tree + the trust structure + likely future distributions.

The key question is:

Who should we nominate to give the trust the most appropriate family group for the future?

A little planning before the election can prevent costly problems later. Please reach out and let’s discuss your situation