How are Family Trusts taxed?

Family Trusts are taxed differently according to the jurisdiction within which they are created, the type of trust, and how the income is distributed to the beneficiaries. Taxation in Family Trusts may be pretty complex, but here is a summary of the key points:

1. Taxation of Income: Income derived from Family Trusts is normally taxed at the trust level, except if it's distributed to beneficiaries. This normally leads most Family Trusts to be treated as pass-through entities for tax purposes, where income granted to the beneficiaries is usually subject to their individual tax rates. Where this income stays within the trust, then it could be taxed at higher trust tax rates.
2. Taxable Events: Certain actions with regard to a Family Trust, including the sale of underlying assets, may trigger an assessment of capital gains. In some countries, where the Family Trust distributes income, beneficiaries must declare the resultant income on their individual returns.
3. Distributions to Beneficiaries: Generally, distributions to beneficiaries when income is made by a Family Trust are taxed at the beneficiary's personal tax rate. Some jurisdictions allow the trust to deduct distributions made, thus reducing the taxable income of the trust. However, the beneficiaries may be taxed on the full amount received from the distribution, including interest, dividends, or capital gains.
4. Taxation of Trust Property: Estate or inheritance taxes may also be payable on the death of the settlor in respect of assets held in a Family Trust depending upon the type of trust and terms in the trust deed in some jurisdictions. The assets held may be added to the estate tax calculation.
5. Tax deductibility: Available in many cases, depending on the jurisdiction and purpose for which the trust was set up, the contributions to a Family Trust may be tax-deductible. These are mainly reserved for charitable trusts rather than for Family Trusts.

While Family Trusts will allow a degree of flexibility in respect of the distribution of assets and estates, there are tax implications. The services of a tax advisor or estate planner should be sought to ensure that the trust will comply with the relevant applicable taxing laws, and in fact, is properly structured to achieve the most tax-efficient outcomes.