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A trust becomes a family trust if it makes a family trust election. In order to be eligible to be a family trust, a trust must first pass a control test. In effect, where only one family uses the trust, the trust will satisfy this test. However, a unit trust in which two separate family groups hold units cannot be a family trust.
When the control test is passed, a trust can become a family trust by the trustee simply making an election. The election must state who the “test individual” is. The test individual is then used to determine the “family group”. Distributions or benefits provided outside the family group will be subject to family trust distributions tax, being tax at the top marginal rate plus Medicare.
Accordingly, a family trust is restricted to distributing to the family group. The family group comprises the test individual and the following:
- a spouse or former spouse
- lineal descendants including children, grandchildren and great-grandchildren
- a parent, grandparent, brother, sister, nephew or niece of the test individual or their spouse
Some other topics covered in the full version of this document
Why be a Family Trust? Firstly, a discretionary trust that acquires shares after 31 December 1997 cannot distribute the franking credits arising from those shares, unless it is a family trust or unless the beneficiaries are eligible to use the “small shareholders’ exemption”.
Choosing the Test Individual To make a family trust election, the trustee must specify the test individual. The test individual is used to determine the family group and therefore…
Interposed Entity Election An interposed entity election allows an entity to be treated as part of the family group, provided that the family controls the entity.