Transferring personal assets into a family trust is a popular vehicle for wealth protection and estate planning. The advantages are well-publicised—asset shielding, tax planning, succession control—but the legal mechanics behind the transfer are often overlooked. As accountant Geoff Gartly notes, family trusts can serve as a flexible and central structure for managing investments. This post outlines how to effectively gift, sell or loan assets to a discretionary trust in Australia, and why careful structuring matters.
Understanding the Legal Mechanics of a Trust
At law, a trust separates legal and equitable ownership: the trustee holds title; the beneficiaries hold rights to enjoyment. The trustee owes fiduciary duties to act in good faith, avoid conflicts, and adhere strictly to the trust deed.
Three Pathways into the Trust
1. Gifting
Gifting assets is the most common method of trust funding, but gifts must be properly constituted:
-
There must be a clear intention to gift;
-
The asset must be delivered or transferred; and
-
The trustee must accept the gift.
Execution of a formal Deed of Gift, supported by trustee resolutions, is best practice. Critically, where legal title requires registration (e.g. Torrens land, shares), vesting is not complete until registration occurs.
An imperfect gift may result in a resulting trust back to the donor. Thus, half-formed intentions or informal transfers can defeat the entire strategy.
2. Selling
An asset can be sold to the trust at market value. This requires:
-
a valid contract of sale,
-
arm’s-length pricing, and
-
valuation evidence to satisfy the ATO.
3. Loaning
Loans are highly flexible. They allow the funder to retain the right of repayment and avoid CGT on transfer. If a company is involved, Division 7A requires:
-
commercial terms,
-
documented interest and repayments.
While not mandatory, a written loan agreement helps mitigate audit risk.
Tax and Legal Triggers
CGT:
Whether gifting or selling, the transfer triggers a CGT event (E1 or E2), based on market value, even if no consideration is received. Limited exemptions apply (e.g. main residence). The 50% discount may still assist.
Stamp Duty:
Dutiable property (especially real estate) transferred to a trust is liable for stamp duty at market value, regardless of whether the transfer is a gift or sale. Rates vary significantly between states. Seek state-specific advice.
Vesting Formalities:
The trust must actually receive the asset. Transfers must comply with registration requirements (e.g. ASIC, Land Titles Office). The failure to complete this step can leave the asset outside the trust altogether.
Asset Protection: Not Absolute
Trust structures do not provide a bulletproof shield.
Insolvency: Transfers with an intention to defeat creditors may be set aside under the Bankruptcy Act 1966 (Cth).
Family Law: Trusts are not immune from property settlement orders. Courts can treat trust assets as part of the matrimonial pool if one party controls or substantially benefits from the trust.
Trustee Obligations
Once assets are in the trust, trustees must:
-
invest prudently and avoid speculative risks,
-
act impartially between beneficiaries,
-
comply with the deed and relevant trustee legislation,
-
keep trust records and lodge tax returns.
Trustees may be personally liable for breaches—even inadvertent ones. Equitable remedies such as compensation or tracing may apply.
Conclusion
Gifting assets to a family trust may appear simple, but it is laden with legal traps. Improperly constituted gifts, failure to vest property, and mismanaged trustee duties can unravel the intended structure. Professional advice should always be sought to ensure tax compliance, asset protection, and legal effectiveness.
Reach out to Brett if you wish to talk about your circumstances – contact page