Family Trusts and Property Development: Building Wealth and Protecting Your Legacy

Ida Bahrami
5 days ago
5 min read

When it comes to property development and investment, choosing the right ownership structure is just as important as choosing the right site. The wrong structure can leave families exposed to unnecessary tax bills, costly disputes, or even losing hard-earned wealth to creditors.

One structure that consistently stands out in Australia is the Family Trust.

In this joint article, OwnerDeveloper and LexAlia, explore how Family Trusts work, why they are so widely used in property development, and the practical considerations families must weigh before setting one up.

What is a Family Trust?

A Family Trust (also known as a discretionary trust) is a legal arrangement where a trustee holds assets, such as property, shares, or cash, for the benefit of family members (the beneficiaries). The trustee has discretion to decide how income and capital are distributed, subject to the terms of the trust deed.

Unlike companies or individuals, a trust is not a separate legal entity. It is a relationship recognised by law, and the trustee is the legal owner of the assets, managing them for the benefit of others.

Key features of a Family Trust in Australia:

Set up through a formal trust deed, prepared with legal and accounting input.
Controlled by a trustee (either individuals or a corporate trustee).
Beneficiaries usually include spouses, children, and extended family members.
Requires its own TFN/ABN and must lodge annual tax returns.
Income can be distributed to beneficiaries in varying proportions each year, based on their tax position.

This combination of flexibility and control is what makes Family Trusts particularly powerful in property development.

Why Property Developers and Investors Use Family Trusts

For developers and investors, Family Trusts are more than a tax strategy — they’re a framework for stability and growth.

1. Asset Protection

For developers, the biggest risk is exposure. Projects can stall, builders can collapse, or disputes can drag through courts. By using a Family Trust with a company as a trustee, personal assets (like the family home or savings) are better insulated from claims against the trust’s activities.

As LexAlia explains:

“A Family Trust separates ownership from benefit. This shield can protect families if a development goes wrong, keeping personal wealth safe from creditors, lawsuits, or even bankruptcy.”

2. Tax Planning and Distribution Flexibility

Trustees can distribute income to family members in lower tax brackets, reducing the family’s overall tax burden. For example, profits from a townhouse development might be split between adult children and a spouse, rather than taxed at one person’s top marginal rate.

Trusts can also access the 50% capital gains tax discount if assets are held for more than 12 months, further enhancing after-tax returns.

3. Intergenerational Wealth Transfer

Because a trust is not tied to an individual’s lifespan, assets can be passed to children or grandchildren without triggering probate or transfer costs. Control of the trust can be handed down while the property portfolio remains intact.

This makes Family Trusts an effective estate planning tool, particularly for families building long-term development pipelines.

4. Wealth Compounding

Trusts allow families to reinvest profits collectively, rather than liquidating assets and dividing cash. Over decades, this can accelerate growth from a single duplex into a diversified portfolio of townhouses, apartments, or commercial sites.

Setting Up a Family Trust

Establishing a Family Trust is a legal and financial process requiring careful planning.

Steps generally include:

Drafting a trust deed with a lawyer, outlining powers, beneficiaries, and distribution rules.
Appointing a trustee — often a corporate trustee for added protection.
Naming beneficiaries (spouses, children, future descendants).
Settling the trust with an initial sum of money (the “settled sum”).
Registering for a TFN and ABN.
Opening a separate bank account in the trust’s name.
Ensuring compliance with state requirements (including stamp duty on property transfers).

It’s critical that the deed is drafted correctly. Poorly written deeds can create tax headaches, succession disputes, or even invalidate protections.

Family Trust Elections (FTEs)

Under Australian tax law, a trust isn’t automatically recognised as a “family trust” for tax purposes. The trustee must make a Family Trust Election (FTE) with the ATO.

Why make an FTE?

Trust Loss Provisions: Access to concessional rules that make it easier to carry forward losses.
Franking Credits: Ensures franking credits can be passed through to beneficiaries.
Small Business Restructure Rollovers: Allows tax-neutral transfers of business or property assets.

However, FTEs come with obligations. If distributions are made outside the family group, a special penalty, the Family Trust Distribution Tax (FTDT), applies at the top marginal rate plus Medicare levy (47%).

In short: an FTE brings tax benefits, but trustees must keep tight control of who receives distributions and maintain meticulous records.

Advantages of Using a Family Trust in Property Development

Asset Protection – helps protect family homes and savings from development risks when structured correctly.
Tax Flexibility – distribute profits strategically each year.
Estate Planning – pass assets efficiently to future generations.
Pooling Wealth – reinvest profits into new projects without constant restructuring.
Privacy – trusts don’t appear in personal asset searches, offering discretion.

Risks and Limitations to Consider

No structure is perfect. Family Trusts have drawbacks that investors must weigh:

Setup and Maintenance Costs: Legal, accounting, and annual compliance costs (often $3k–$5k upfront, plus ongoing fees).
Negative Gearing Restrictions: Trust losses cannot be distributed to beneficiaries; they remain trapped until offset by future trust income.
Land Tax: In NSW and VIC, trusts do not enjoy the land tax-free threshold, which can increase holding costs.
Finance Challenges: Many banks are cautious with trust loans; borrowing capacity may be limited to 70–80% LVR.
Main Residence Exemption: Trusts generally cannot access the CGT main residence exemption.
Succession Complexity: Poor planning can create disputes about control when the original trustee retires or passes away.

LexAlia notes:

“One of the biggest risks is families treating trusts as a ‘set and forget’ tool. Trusts must be actively managed, with clear succession planning, annual resolutions, and strong governance to avoid costly disputes or family conflicts.”

Real-World Application: Development Scenario

Family A and Family B both buy land for a 4-townhouse development.

Family A buys in personal names. They face top-rate tax on profits, exposure to creditors, and probate issues when transferring assets.
Family B buys through a Family Trust. Profits are split across beneficiaries at lower tax rates. The trust helps shield personal wealth and enables profits to roll into a second project without restructuring.

Over 10 years, Family B builds a compounding portfolio, while Family A loses more to tax, risk, and inefficiencies.

Final Thoughts

Family Trusts are not a silver bullet — but when structured and managed properly, they can be a cornerstone of generational wealth strategy.

For developers, they provide the flexibility to distribute profits tax-effectively, protect assets from risk, and reinvest for growth. For families, they offer estate planning advantages and a smoother path to financial freedom.

At OwnerDeveloper, we guide families through the practical side — feasibility, construction, and project delivery. At LexAlia, they ensure the legal structure protects those efforts and stands the test of time.