A trust is an arrangement that lets a person or company hold property or assets for the benefit of others. The person holding the asset or property is known as the ‘trustee’. The people, or even companies, whose benefit the trust is held in are known as the ‘beneficiaries’.
Unlike a company, a trust is not a separate legal entity. Although it is treated as a separate entity when it comes to paying tax. That means the trustee is personally liable for any of the trust’s debts, which is why many people choose to have a company as trustee.
Trusts can be set up by deed (a written agreement) during a person’s lifetime, or by a Will that takes effect after the person’s death. Trusts established by Will are known as ‘testamentary trusts’.
Why set up a Trust?
There are many reasons someone would choose to set up a trust. These include:
- To better carry out your estate plan;
- To separate the owner of the asset (the beneficiary) and control over that asset (the trustee), (eg. the beneficiary suffers from a disability that affects their decision-making capacity and needs someone else to manage their assets);
- To provide greater flexibility in tax planning and other tax benefits;
- To protect assets from financial claims made against the beneficiary;
- To use as a business entity either for investing (for example, to purchase real estate or a share portfolio) or for trading; and
- To help protect assets from a bankrupt beneficiary, or some family law claims.
Types of Trusts
There are many different kinds of trusts. As well as the trusts described below, other types include superannuation trust funds, charitable trusts and special disability trusts.
The four main types of trusts used in business and by individuals are:
This is a trust created in a deceased person’s Will. For in-depth information on testamentary trusts, see click here.
Discretionary (or Family) Trust
A discretionary or ‘family’ trust is the most common form of trust used by families. Here, the beneficiaries have no defined entitlement to the income or the assets of the trust. Instead, each year the trustee decides which beneficiaries are entitled to receive income and how much this amounts to. For this reason, discretionary trusts have become popular in family tax planning, as they allow income to be allocated to all members of a family, including minors.
Fixed or Unit Trust
Unlike a discretionary trust, the beneficiaries of a fixed trust have a defined entitlement under the trust, similar to a shareholder in a company. This entitlement is usually created by dividing the trust into units in much the same way a company is divided into shares. The trustee doesn’t have any discretion as to how they distribute the trust’s capital and income. A fixed or unit trust is often used for joint venture arrangements – for example, two families wishing to jointly own an asset.
A hybrid trust gets its name because it combines the features of both fixed and discretionary trusts, compelling the trustee to provide a fixed amount during a fixed period, but also allowing them scope to make further distributions.
Duration of Trust
In the ACT, a private (ie. non-charitable) trust can generally last for up to 80 years. The trust deed will set out how long it should last and can specify a shorter term – often based on a specific event happening, such as someone dying or reaching a certain age. The date when a trust reaches the end of its term is known as the ‘vesting date’.
Vesting the Trust
When a trusts ‘vests’, the beneficiaries become entitled to the entirety of assets and income comprising the trust. The trustee must distribute all assets and income to beneficiaries in line with the trust deed. In this instance, a trust deed will usually have a set of rules that the trustee must follow.
Does a Trust pay Tax?
A trust has its own tax file number and is required to lodge tax returns annually. However, a trust generally is not subject to tax if all its income is distributed to beneficiaries. In this case, a trust’s income is taxed in the hands of the beneficiaries, based on their marginal tax rate. If the trust conducts a business enterprise, however, the trust can register for both an ABN and to pay GST.
If you’re considering setting up a trust, or you already have one, we can help by:
- Advising you on whether a trust best suits your goals or objectives;
- Advising you on which sort of trust might better suits your needs;
- Explaining how the trust works and ensuring that you understand and have considered all aspects of how your trust will be governed;
- Explaining the implications of existing or future trusts in relation to your estate planning, family law issues and asset protection requirements; and
- Working with your accountant to provide a cohesive plan tailored to your needs.