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Trusts exist for the purpose of a trustee to hold assets such as property for the benefit of the beneficiaries of the trust. The right trust structure can result in added asset protection, exposure to liability, holding funds and/or allowing pensions for minors and of course tax minimisation. If you would like to discuss the options of setting up a trust for your organisation or business (a unit trust), a trust for your family (a discretionary family trust) or a trust under your will (a testamentary trust) reach out to one of our expert lawyers today.

Trusts: what are they and how do they work?

A trust is an obligation imposed on an individual or an entity to hold property for the benefit of the beneficiaries of the trust. Therefore, it is not considered to be a separate legal entity ‚Äď except for tax purposes, but we will get into that. Trusts are heavily used for both business and wealth management purposes.

As a category of business entity, a trust is the most complex. A trust has its own Australian Business Number and Tax File Number. A trust also requires what is known as a trust deed to outline how it will operate. For example, superannuation funds are generally set up as trusts with the members of the fund being the beneficiaries.

Elements of a Trust

Trustee

The person(s) who administer the trust. The trustee owes a duty to the beneficiaries to always act in their best interests. Each and every transaction for the trust is undertaken by and on behalf of the trustee.

Beneficiary

The beneficiary or beneficiaries are those individuals (or companies) for whom the trust was created to benefit. This can further be broken down to primary beneficiaries (beneficiaries that are named in the trust deed) or general beneficiaries (beneficiaries that are often not named in the trust deed).

Trust Deed

In the case of a testamentary trust, this is referred to as the will. The trust deed or the will is a formal document, preferably drafted by a Lawyer, that outlines how the trust is going to run and the boundaries which the trustee can act within. Creating a trust deed is one of our legal services and it is crucial to get this step right.

Settlor

Often, the settlor simply provides the intial sum of money to initiate the trust, then they have no further obligation. The settlor is responsible for naming the beneficiaries, the trustee and, if applicable, the appointor. The settlor should not name themselves as a beneficiary for tax reasons.

Appointor

The appointor is often referred to as the most powerful person within the trust. If permitted by the trust deed, they have the authority to appoint and remove trustees.

Trust Assets

The range of assets that the trust is to manage. This can include a sum of money, property, investments and a range of other definable assets. The assets can also generate the income of the trust.

Why set up a Trust?

There are a number of reasons why it may be beneficial to set up a trust, including:

Separation of ownership

To separate the ownership of the assets and the control over the assets, especially in instances where the beneficiary’s decision making is compromised or they are underage;

Tax planning

To distribute income to beneficiaries in lower tax brackets, such as children or spouses;

Asset protection

To protect the assets from claims made against them.

However, there are also issues to be aware of, including:

  • If any income is not distributed to a beneficiary, it will be taxed at the highest marginal tax rate determined by their annual income;

  • There are costs associated with the establishment and ongoing management of a trust;

We help our clients achieve the most optimal outcomes when it comes to the administration of their trust.

Discretionary Family Trust

The most common form of trust used by families.

Discretionary trusts allow the trustee to define entitlements for the beneficiaries each year. This can be attractive to families looking to minimise tax implications via the conduit of income streaming. In some circumstances, it also provides an extra layer of asset protection.

In some circumstances, in order to be classified as a family trust, the trust must satisfy the family control test. The family control test will look at, among other factors, who can manage the trust income.

Our will and estate Lawyers will be happy to assist you and your family with general advice for your discretionary trust.

Unit Trust

Fixed or unit trusts are used by business or entities that want to investor hold assets for the unit holders (beneficiaries). The units are basically ‚Äúcompany shares‚ÄĚ allowing holders to have defined interest in the assets and can be transferred or reacquired by the trustee.

In contrast to discretionary family trusts, beneficiaries of unit trusts have a defined entitlement. This is quite similar to being a shareholder of a company, where the trust is divided into units (similar to shares). Further, the trustee does not have the authority to decide how they distribute the capital and income of the trust.

For further information on unit trusts, contact our commercial law department today for strategic advice.

Testamentary Trust

Testamentary trusts are a form of discretionary trust created through wills to hold and manage the estate to be distributed in the form of income or capital to the beneficiaries according to the will. There are significant advantages of including testamentary trusts in wills.

Upon the death of the individual for whom the will is created on behalf of, the assets of the deceased person are shared among the trustees of the testamentary trust that controls the assets for and on behalf of the beneficiaries.

There are a number of benefits that accompany establishing a testamentary trust instead of a simple will, including:

Family law separation

In the event that a beneficiary (often a child) is going through, or about to go through, family law separation proceedings, any inheritance they receive through a standard will may be exposed. However, a testamentary trust may be structured so as to reduce the risk of the beneficiary’s inheritance being labelled as matrimonial property, therefore decreasing the likelihood of it forming part of the property pool. If structured correctly, a testamentary trust may result in the inheritance being labelled a financial resource and therefore not automatically divisible.

Exposure to Liability

In the instance that a beneficiary owes money to creditors prior to receiving their inheritance, the inheritance would be exposed to those creditors. However, if the inheritance was received through a testamentary trust, those creditors would not be able to access the assets while they are held in trust.

Minors

If a beneficiary is under the age of 18, a standard will generally stipulate that they will receive their inheritance upon turning 18. The issue? This doesn’t take into consideration the mentality of the beneficiary at the time they turn 18, where they could be irresponsible, financially immature or even facing bankruptcy. Instead, a testamentary trust provides that the nominated trustee can decide when the child is ready to receive the inheritance.

trust 1

Why set up a Trust?

There are a number of reasons why it may be beneficial to set up a trust, including:

Separation of ownership

To separate the ownership of the assets and the control over the assets, especially in instances where the beneficiary’s decision making is compromised or they are underage;

Tax planning

To distribute income to beneficiaries in lower tax brackets, such as children or spouses;

Asset protection

To protect the assets from claims made against them.

However, there are also issues to be aware of, including:

  • If any income is not distributed to a beneficiary, it will be taxed at the highest marginal tax rate determined by their annual income;

  • There are costs associated with the establishment and ongoing management of a trust;

We help our clients achieve the most optimal outcomes when it comes to the administration of their trust.

Discretionary Family Trust

The most common form of trust used by families.

Discretionary trusts allow the trustee to define entitlements for the beneficiaries each year. This can be attractive to families looking to minimise tax implications via the conduit of income streaming. In some circumstances, it also provides an extra layer of asset protection.

In some circumstances, in order to be classified as a family trust, the trust must satisfy the family control test. The family control test will look at, among other factors, who can manage the trust income.

Our will and estate Lawyers will be happy to assist you and your family with general advice for your discretionary trust.

Unit Trust

Fixed or unit trusts are used by business or entities that want to investor hold assets for the unit holders (beneficiaries). The units are basically ‚Äúcompany shares‚ÄĚ allowing holders to have defined interest in the assets and can be transferred or reacquired by the trustee.

In contrast to discretionary family trusts, beneficiaries of unit trusts have a defined entitlement. This is quite similar to being a shareholder of a company, where the trust is divided into units (similar to shares).

Further, the trustee does not have the authority to decide how they distribute the capital and income of the trust.

For further information on unit trusts, contact our commercial law department today for strategic advice.

Testamentary Trust

Testamentary trusts are a form of discretionary trust created through wills to hold and manage the estate to be distributed in the form of income or capital to the beneficiaries according to the will. There are significant advantages of including testamentary trusts in wills.

Upon the death of the individual for whom the will is created on behalf of, the assets of the deceased person are shared among the trustees of the testamentary trust that controls the assets for and on behalf of the beneficiaries.

There are a number of benefits that accompany establishing a testamentary trust instead of a simple will, including:

Family law separation

In the event that a beneficiary (often a child) is going through, or about to go through, family law separation proceedings, any inheritance they receive through a standard will may be exposed. However, a testamentary trust may be structured so as to reduce the risk of the beneficiary’s inheritance being labelled as matrimonial property, therefore decreasing the likelihood of it forming part of the property pool. If structured correctly, a testamentary trust may result in the inheritance being labelled a financial resource and therefore not automatically divisible.

Exposure to Liability

In the instance that a beneficiary owes money to creditors prior to receiving their inheritance, the inheritance would be exposed to those creditors. However, if the inheritance was received through a testamentary trust, those creditors would not be able to access the assets while they are held in trust.

Minors

If a beneficiary is under the age of 18, a standard will generally stipulate that they will receive their inheritance upon turning 18. The issue? This doesn’t take into consideration the mentality of the beneficiary at the time they turn 18, where they could be irresponsible, financially immature or even facing bankruptcy. Instead, a testamentary trust provides that the nominated trustee can decide when the child is ready to receive the inheritance.

Testamentary trusts can provide greater protection of assets, income tax benefits, superannuation and life insurance interest. To incorporate a testamentary trust into your will, contact our experienced Wills and Estate lawyers.

Charitable trust

A charitable trust is a type of trust that is established for charitable purposes.

Establishing a charitable trust has significant benefits when it comes to paying taxes. Firstly, a charitable entity is exempt from income tax under Division 50 of the Income Tax Assessment Act 1997 (Cth).

Of course, charitable trusts have limited powers and objects so they are limited in that capacity.

Special disability trust

Both immediate family members and carers can establish a special disability trust with the objectives of providing for the future or accommodation needs of an individual with a disability. In these unique circumstances, the trustee is subject to tax at their individual tax rate.

Other key terms

You may encounter several other key terms in the process of establishing your trust. If you are ever unsure about any of them, speak to one of our lawyers today.

Vesting date

The beneficiaries become absolutely entitled to all of the trust’s assets and income when the trust vests, this is known as the vesting date.

Trusts and Taxation

Generally, a trust won’t be subject to tax at the stage of the income being distributed to the beneficiaries. However, the individual must pay tax on that income at their own marginal tax rate. Additionally, in the event a trust undertakes a business enterprise it is eligible to register for GST and its own ABN.

Trust Disputes

Whether they arise during the establishment of the trust or the administration of the assets, our Wills and Estate Lawyers are experienced in managing and settling trust disputes.

Testamentary Trusts

Testamentary trusts created under a Will to hold and manage the estate to be distributed in form of income or capital to the beneficiaries according to the Will. Testamentary trusts can provide greater asset protection, income tax benefits, superannuation and life insurance interest. To incorporate a testamentary trust to your will, contact our experienced Wills and Estate lawyers.

Disclaimer

The above is general legal information and should not be considered legal advice. You should speak with one of our lawyers for legal advice tailored to your specific legal matter. It should also be noted that there may be delays due to COVID-19.

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Frequently Asked Questions.

A trust is not a legal entity in Australia. Therefore, trust can’t enter into legal agreements in its own capacity. A trust also won’t have the benefit of being a liability limited entity. For example, when executing a document, an individual must sign on behalf of the trust.

A trust simply can’t operate efficiently without a trust deed. It defines all conditions and terms for the operation of the trust, including the goal of the fund and to whom payments are to be made.

It’s quite similar to a parent opening a child’s bank account. While the child is the one who will benefit, the parent retains full management of the account.

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