You might have colleagues, friends or family who say they operate a trust. Trusts are often spoken about, but not often understood.
So what is a trust?
In its simplest form, a trust is a legal arrangement where property is held by one person (the trustee) for the benefit of another person (the beneficiary). The property that is held by the trustee could be anything – for example money, a boat, real estate, or shares.
The rules under which the trust can operate are varied. In Queensland, trusts are governed by legislation, mainly through the Trusts Act.
As well as complying with the legal rules regarding trusts, each trust must be managed in accordance with a trust deed which establishes the trust. Trust deeds are important legal documents generally drawn up by solicitors. Trust deeds are usually tailored to suit the needs of the client. This document sets out what the trustee can and cannot do and also how the trust is to operate. In that sense it is like an operations manual that tells the trustee how to manage the trust.
Once established, a trust can have a life of 80 years. After this time, it becomes void.
So how does one set up a trust?
The first thing that is required is a settlor. This is the person who establishes the trust by donating the property which will be held for the beneficiary. Most settlors do this by donating a token amount, usually $10 to the trust.
Next, an appointor is required to appoint and remove the trustee. The trustee is the person who effectively manages the trust. This person must have the knowledge and ability to carry out the tasks required of a trustee.
Finally there is a beneficiary (or beneficiaries) who take the benefit of the trust.
There are many different types of trusts – some examples include discretionary, family, unit, superannuation, and testamentary. Each type of trust is different in the way it operates and is managed. When establishing a trust, it is important to match your needs (or the needs of your family) to the most appropriate type of trust.
Trusts are an important tool for asset protection and tax minimisation. This is why many business owners operate trusts. In terms of asset protection, it is often the case that the trustee will be a company (known as a corporate trustee). This is because the trustee may be personally liable for any debts incurred by the trust. To limit exposure to these debts, corporate trustees are often put in place to ensure adequate protection from creditors.
It is often the case that the corporate trustee is a company with no assets.
In terms of taxation, family discretionary trusts are a popular strategy for many business owners (and non business owners alike). The principle behind the discretionary trust is that the trustee has ultimate discretion as to which of the beneficiaries they will distribute funds to in any given year.
To look at this in an example, let’s assume John and Mary own a business which operates through a family trust. The beneficiaries of the trust are John, Mary, David (20 year old son) and Jane (18 year old daughter). If John and Mary split the income from their business (let’s say it earns them $85,000 each), then they each pay tax at the rate of 37%. If instead, they distribute $20,000 of their income to each of David and Jane, who are students and do not work, they now pay tax at the rate of 30%.
This is just a simple example of how a discretionary trust may minimise tax.
There are many different considerations to take into account when setting up a trust. Please call us if you think a trust may benefit yourself, your business or your family. We can assist you in providing preliminary advice, setting up the trust, and then ongoing advice on how to manage the trust.