What is a trust
A trust is a legal structure which allows individuals to hold a property or an asset for the benefit of others.
Key terms used in a trust
A settlor establishes the trust. If you hold this position, you have the responsibility to appoint a trustee and name the beneficiaries
A trustee is responsible for the assets within the trust, this includes the distribution of income and capital gains to the beneficiaries. As a trustee you are required to ensure the trust is managed under the trust deed. The trust deed is a legal agreement that includes the terms and conditions of the trust.
A beneficiary receives the benefits from the trust. As a beneficiary you have no control over the trust.
Types of trusts
A discretionary trust is the most common trust. This trust allows the trustee to gain full discretion on the distribution of assets including how much and which beneficiaries will receive the assets each year. This trust provides flexibility with your tax planning when working towards managing your assets between one generation to another. It is beneficial if you are looking to protect your personal or family assets from exposure to claims from potential creditors or a plaintiff with legal action.
For example, if you are part of a trust and a creditor wanted your property, the property is generally protected as the trustee is the legal owner rather than yourself whereas, if the property was not under a trust and you face bankruptcy, there is a high chance you would lose the property.
A fixed trust is when the trustee sets fixed entitlements when distributing the assets for the benefit of each beneficiary, meaning that if you are a beneficiary in this trust you are entitled to a fixed share. Similarly, a unit trust is where each beneficiary holds a certain number of units. As a beneficiary, also known as a ‘unit holder’, the income that is distributed to you will be based on the proportion of units that you hold in the trust. This trust is generally set up for joint business ventures or investment purposes.
For example, if you and a friend decide to buy a property and own it together with each having a 50% share, in the fixed trust you are entitled to your 50% of share of income.
A hybrid trust is a combination of both discretionary trusts and unit trusts and is useful for those that hold capital growth or income generating assets. In this trust there is a mix in both unit holders and discretionary beneficiaries in which the trustee has the power to distribute the income to each beneficiary in a proportional order.
For example, if you are a discretionary beneficiary, you will receive the amount decided by the trustee whereas if you are a unit holder, you will receive your share according to the proportion of units you hold with the income that has not been distributed.
A testamentary trust is established per the deceased’s will, meaning that it does not exist until the person making the provisions passes away. In this trust, the deceased estates are held in a trust first and then distributed among the beneficiaries according to their will. As a beneficiary, the distribution of assets you receive will depend only on the rules and conditions included in the deceased’s will and cannot be specifically allocated otherwise. This trust is beneficial to protecting assets and can reduce tax paid from the income earned from the inheritance.
For example, if you take the inheritance under your name, you will be required to pay tax at a personal marginal tax rate whereas, if the inheritance is under a trust the income, capital gains etc. are split amongst the beneficiaries at a lower marginal tax rate.
Special Disability Trust
A special disability trust is established for a principal beneficiary that may include a disabled or a vulnerable family member. This trust is usually set to provide provision for the future care and accommodation needs of the principal beneficiary. As a parent or immediate family member you can leave assets in the trust to support the fund yourselves without affecting your own entitlements. This is known as a gifting concession.
For example, if you are a family member you can gift up to $10,000 per year to the fund however, if you go over and send $12,000, the excess $2,000 will be maintained as a financial asset for a 5-year period.
How Wilson & Assoc can help?
We can help you determine what trusts suit you and your financial needs through our advisory services. We can also help you with the set-up process and help you understand all the tax obligations that are required.
If you need help with anything, please feel welcome to contact our friendly team at Wilson & Assoc Chartered Accountants.
Source: Law Council of Australia
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Disclcaimer: The information provided within this article is general information only. None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.
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