Trusts: What you should know
- Financial Planning
A trust is a legal relationship which is recognised and enforced by the courts.
In a trust, a person or company (the trustee) is required to hold and distribute assets on behalf of one or more beneficiaries. Assets can be anything from equity, to shares or even real estate, and beneficiaries can be individuals, companies, or organisations.
What is the purpose of a trust?
Trusts are useful for a whole range of personal and corporate purposes. Some common ways trusts are used in transactions include:
- To invest, such as cash management trusts and property trusts
- To hold money for family members for the future
- To protect family assets and assist with tax planning
- To hold money and assets for the purposes of research or charitable purposes
- To protect business assets
- To protect the financial interests of people with a disability and provide for their needs
- For superannuation
Types of trusts
Discretionary trusts (family trust)
In this case, the beneficiaries have no fixed interest in the assets and the trustee can distribute income or capital however they see fit. This flexibility means they are useful for family tax planning, according to financial planner Catherine Smith from Wholistic Financial Solutions.
“In a dual income household, a trustee might decide to allocate more income to the lower earning individual. This could afford the couple the maximum tax benefit,” says Smith.
The beneficiaries of unit trusts (known as unitholders) have a set interest in the trust, identified by holding units. These units can be likened to shares in a company. Each unitholder receives a set income or capital from the trustee, according to the number and value of units they hold.
“This trust structure is mostly used by unrelated parties. It is common for investment trusts like managed funds, property trusts, and joint business ventures,” says Smith.
These trusts are created under a will and take effect when the testator (will maker) dies. “They are good for protecting the testator’s assets against creditors and divorcees since the assets are owned by the trust, not the individual,” says Duncan Barber, Managing Director of Accounting and Advisory at Omniwealth. Testamentary trusts also provide capital gains tax benefits since this tax can also be shared among beneficiaries.
Superannuation funds in Australia operate as trusts. Their obligations are set out in the Superannuation Industry (Supervision) Act 1993, including special provisions to which the funds must comply, such as the minimum age of entitlement.
A basic trust in which one beneficiary has absolute right to the assets and any income generated by the trust.
These trust structures exist for the purpose of charitable and philanthropic work. They have special tax concessions and tax deductions for taxpayers who gift money to them.
How do I set up a trust?
To set up a trust, follow these steps:
- Determine assets to be held by the trust
- Appoint a trustee
- Determine the beneficiaries
- Draft a trust deed
- Pay stamp duty
- Register as a company (if required)
- Open a bank account
- Start operating as a trust
There are a number of websites that can assist with establishing a trust, including the ATO (Australian Taxation Office).
Who can be a trustee?
A trustee can be any legally competent person or company. This person or entity is obligated to act in the best interests of the beneficiaries at all times, otherwise they may be held liable by beneficiaries.
Trusts and tax
The tax payable from income allocated from trusts depends on the beneficiary entitlements at 12:00am on June 30— each year. If all or part of a trust’s income is paid to a beneficiary, that income is assessed as normal for tax purposes — unless that beneficiary has a legal disability, in which case tax concessions may apply. Any income to which the trustee deems no beneficiaries are entitled to yet is taxed at 47 per cent.
Trusts whose beneficiaries are individuals that have held assets for 12 months or more are eligible for a 50 per cent concession on tax for capital gains.
What else do I need to know about trusts?
It’s useful to know that trusts have pitfalls and aren’t for everyone:
- There are ongoing obligations and administrative duties for trustees and beneficiaries.
- Some trusts — such as discretionary trusts — can lead to disputes among beneficiaries.
- Trusts can require a thorough understanding of the legal complexities set out in the deed.
What should I do before establishing a trust?
Do your homework and meet with the experts first. This includes seeking professional legal advice for the deed, as well as a qualified tax agent and a financial planner to discuss how being involved in a trust will affect you and your loved ones financially.
What experience have you had with trusts? Share your thoughts below.