In Australia, the term “family trust” usually means a discretionary trust. A family trust can be useful for asset holding and succession planning, but there are several material disadvantages—particularly in the estate planning context. Below is a summary of some of these disadvantages;
- Complexity of control and governance; The critical issue with a family trust is often who actually controls the trust. In estate planning terms, the major risk is that a Will may deal with the deceased’s shares in the trustee company or appointor rights, but not necessarily achieve the intended practical outcome unless the trust deed and corporate documents align.
- Trust assets do not form part of the estate; this is often presented as a benefit, but it is also a significant disadvantage. As the trust assets are not owned by an individual they cannot be simply gifted in a Will and testamentary intentions can be defeated if control of the trust passes elsewhere.
- High potential for family conflict; as the distributions of the trust are not fixed this can leave to disputes over unequal distributions.
- The trustee bears personal exposure; the trustee holds legal title and is ordinarily the party exposed to third-party claims and liabilities incurred in administering the trust. Where the trustee is an individual, that person may face substantial personal risk, subject to rights of indemnity out of trust assets. This is why many trusts use a corporate trustee, but that adds cost and administration.
- Ongoing administrative burden and cost; A family trust is not a “set and forget” structure. It requires a lot of administration and regulation costs, including but not limited to annual accounts and tax returns, and maintenance of trustee records. This is where you really need to ask yourself are the costs of running the trust outweighed by the benefit of the trust itself?
- Tax disadvantages and traps; whilst a family trust can offer tax flexibility there are also many hidden traps that you need to be aware of. Your accountant will be able to assist you with what these may be.
- NSW land tax disadvantages; Land held in a discretionary trust is often treated as special trust land, which generally means there is no tax-free threshold available in the same way as for an individual owner. As a result. This is one of the most common reasons a discretionary trust is unattractive for residential investment property in NSW.
- Foreign person surcharge issues; A significant NSW trap is the treatment of discretionary trusts for foreign purchaser duty and surcharge land tax purposes. If the trust deed permits a foreign person to be a potential beneficiary, the trust may be treated as a foreign trust, even if no foreign person actually receives a distribution. Unless the deed has been appropriately and irrevocably drafted or amended to exclude foreign persons, surcharge consequences can arise. If you are unsure if your trust deed excludes foreign beneficiaries please contact our team today on 4627 3333 for assistance.
- Limited usefulness where the objective is negative gearing; Where the trust holds negatively geared investments, the loss is generally trapped in the trust and cannot be used by beneficiaries against salary or other personal income. That makes a discretionary trust less attractive than personal ownership for some investment strategies.
- Financing can be more cumbersome; Lenders frequently require: guarantees from controllers; more extensive documentation; evidence of trustee powers under the deed; and in some cases, more conservative lending terms.
- Family law and insolvency outcomes are not always protective; A discretionary trust is often marketed as an asset protection vehicle, but that protection is incomplete.
- In family law, trust assets may be treated as property or at least a financial resource, depending on control and surrounding circumstances.
- In insolvency, protection can fail where the bankrupt effectively controls the trust or where transfers into the trust are vulnerable to clawback.
12. Vesting date and long-term succession issues; Most discretionary trusts are not perpetual. The deed will usually contain a vesting date, and when the trust vests, capital must be dealt with in accordance with the deed. That can create:
- tax consequences;
- pressure to restructure;
- disputes over final entitlements; and
- uncertainty if the trust has become central to family wealth planning.
13. No fixed entitlement for beneficiaries; From a succession and family governance perspective, this can be both a feature and a defect. A discretionary beneficiary usually does not have a fixed proprietary entitlement before distribution. That means:
- beneficiaries have uncertainty;
- intergenerational planning may feel unfair or opaque;
- beneficiaries may have difficulty proving economic interest; and
- expectations can become misaligned with legal rights.
If you or someone you know requires assistance in setting up a family trust or reviewing a discretionary trust deed document contact our experienced team of solicitors today on 02 4627 3333 for assistance.
This article was published on 27/03/26 and the information is valid as at the date of publishing. This article is general in nature and is not and should not be considered or relied on as legal advice. Meehans Solicitors is not responsible in the event this information is relied upon by the reader in the absence of specific legal advice.
