Trusts
Many families when they start to create wealth or are looking at starting a business are told about setting up a Trust, often a Discretionary Trust to own/hold/operate the investments or business.
What is a Family/Discretionary Trust
What is a Settlor
What is a Beneficiary
What is a Trustee
Can a Trustee be removed– yes generally by an Appointor
What is a Trust Deed
Is a Trust a Separate Legal Entity
Advantages
Trust Streaming Measures- 2011
Other Types Trusts
What the ATO has to say about trusts
What is a Family/Discretionary Trust?
- A Trust is created by a settlor and then exists as a relationship between the trustee beneficiaries and is not a separate legal entity. Basically a Trust holds investment and business assets for the benefit of beneficiaries, normally the family who own/control the trust).
- – The settlor’s gives the assets to the trustee to hold for the benefit of the trust’s beneficiaries on the terms and conditions set out in the trust deed. The settlor executes the trust deed and then, generally, has no further involvement in the trust.
- – The beneficiary(s) are normally the persons who have a discretionary entitlement to the Trust assets, you, and by definition your spouse, children, and other relatives.
- – The Trustee is the person who holds the the investment or business assets on behalf of the beneficiaries, the trustee is respsonsible for the Trust and has broad powers to manage the trust.
- – yes, a Trust Deed has person(s) named in it who are often called appointor(s). Trust Deeds are usually written to show that Appointors have the power to remove a trustee. As such Appointors usually have significant powers and therefore can be said to control the trust, as such the selection of who should be the Appointor or how many other persons should also be joint Appointor’s should be considered carefully for asset protection purposes.
The trust is established by the trust’s settlor and trustee (or trustees) signing the trust deed, and the settlor giving the trust property (the “settled sum”) to the trustee.
– Is a document that sets out the terms and conditions which a family trust is established and maintained and spcifies the persons/entities who are the Trustee, Settlor, beneficiaries, Appointor, and sometimes Guardian.
Is a Trust a Separate Legal Entity
- – A Trust is not a separate legal entity which means the trustee can be sued and indemified from trust assets. Trusts often use a Company to act as trustee so that the individuals are not caught up in any litigation which can ‘blur’ trust assets and personal assets held in the individuals name. Where a ‘$2’company is used then as the company has no assets, the litigation often centers around being indemnified from trust assets.
- can provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax “tax-free thresholds”.
- can assist in protecting the family group’s assets from the liabilities of one or more of the family members (for instance, in the event of a family member’s bankruptcy or insolvency);
- provides a mechanism to pass family assets to future generations; and
- can be the subject of a family trust election which provides it with certain tax advantages, provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are within the ‘family group’;
New Trust Law Streaming Measures
- – Trust Law and Tax Law concepts of income are not the same, the ATO has announced a reform of legislation to address these differences, in particular in respect to distributions from trusts & the new concept of ‘specific entitlement’, to read more
<click here>.
- – include Fixed Trusts (often called Unit Trusts and often used for property transactions) and Hybrid Trusts, with fixed and discretionary elements to the trust, care needs to be taken with Hybrid Trusts.
- In a Fixed Trust, the share that beneficiaries have in assets and income (which may be proportional or absolute) are pre-determined and ‘fixed’, leaving no leeway for the trustee to vary income distribution. Unit trusts are typically fixed trusts as each unit held in the trust represents an entitlement to a certain proportion of the income and/or capital.
- A Discretionary Trust provides the trustee with a ‘discretion’, as the name implies, over who receives distributions from the trust. The discretion must be exercised in accordance with the terms of the trust deed.
- A hybrid trust has characteristics of both fixed and discretionary trusts, and can be a unit trust with discretionary distribution options, or a discretionary trust but with certain entitlements that are fixed by the trust deed (so that, for example, a percentage always has to go to a charity). A hybrid trust can be anything that is neither totally discretionary nor totally fixed.
See what the ATO has to say about Trusts <ATO-Link>.
See how Trusts are considered for <Asset Protection> purposes.