There are many reasons someone would choose to set up a trust. These include:
To separate the owner of the asset (the beneficiary) and control over that asset (the trustee), eg where the beneficiary is under age or suffers from a disability that affects their decision making;
To provide greater flexibility in tax planning and other tax benefits;
To protect assets from financial claims made against the beneficiary; and
To use as a business entity either for investing (for example, to purchase real estate or a share portfolio) or for trading.
Any trust needs a number of elements before it can start operating:
The settlor: The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons, the settlor should not be a beneficiary under the Trust.
The trustee: The trustee (or trustees) administers the trust. The trustee owes a duty directly to the beneficiaries and must always take into account their best interests in anything they do. All transactions for the trust are carried out by and in the name of the trustee.
The beneficiary or beneficiaries: The beneficiaries are the people or companies for whose benefit the trust is set up. Beneficiaries can be either primary beneficiaries (who are named in the trust deed) or general beneficiaries (who often are not named individually). General beneficiaries are usually existing or future children, grandchildren and relatives of the primary beneficiaries.
The trust deed: The trust deed (or, in the case of a testamentary trust, the will) is the formal document which sets out how the trust will run and what the trustee is allowed to do. It is very important that the trust deed or will is drafted by a solicitor.
The appointor: Many, but not all, trusts also have an appointor. The appointor is very important as they have ultimate control over the trust. The appointor has the power to appoint and remove the trustee. For this reason, you should always carefully consider who you name as appointor.
There are many different kinds of trust. As well as the types of trust described below, trusts include superannuation funds, charitable trusts and special disability.
The three main types of trusts which are used in business and by individuals are:
Discretionary (or family) trust:
A discretionary trust or family trust is the most common form used by families. The beneficiaries of the trust have no defined entitlement to the income or the assets of the trust. Each year, the trustee decides which beneficiaries are entitled to receive the income and how much they should get. For this reason, discretionary trusts have become popular in family tax planning.
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 is usually done 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 want to own an asset together.
A hybrid trust gets its name because it combines the features of both a fixed and discretionary trust, compelling the trustee to provide a fixed amount but also allowing them some scope to make distributions.
If you’re considering setting up a trust or already have a trust, a solicitor can help in many ways, including:
Advising you on whether a trust suits your goals or objectives;
Advising you on which sort of trust is right for your needs;
Explaining how the trust works and ensuring that you have taken account of all aspects of how your trust will be governed;
Helping you identify the appropriate trustee and appointor;
Explaining the implications of trusts in your estate planning, family law issues and asset protection requirements; and
Working with your accountant (where applicable).
Peter and Bob will advise you on Trusts. Call us today.
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