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What is a Trust?

Written by Julia King . August 14, 2017
3 min read

Trusts are widely used for investment and business purposes as they can limit personal liability and provide some flexibility surrounding the distribution of profit/income. We often suggest these types of structures as a suitable option for some clients, depending on their situation, as they can access favourable CGT provisions which are not available to a company.

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. It’s an arrangement which lets a person or company hold property or assets for the benefit of others. The person or company holding the asset or property is known as the trustee. The people, or even companies, for whose benefit it is held are known as the beneficiaries.

Who does a Trust include?

A trust relationship in most cases requires the following stakeholders:

  • The settlor: a 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: as mentioned above, is the administrator of the trust. It/he/she owes a direct duty to the beneficiaries and must always take into account their best interests in anything they do.
  • The beneficiary or beneficiaries: The people or companies are 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 can in most case include existing or future children, grandchildren and relatives of the primary beneficiaries.
  • The trust deed: Is a formal document which sets out how the trust will run and what the trustee is allowed to do.
  • The appointor: Many, but not all trust have an appointor. It is very important as they have ultimate control over the trust. Its also has the power to appoint and remove the trustee.

Types of Trusts

The most common types of trusts can include:

Discretionary (or family) trust

These are 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

Fixed or unit trust

the beneficiaries have a defined entitlement under the trust, similar to owning a share in a company. The trustee doesn’t have any discretion as to how they distribute the trust’s capital and income.

Hybrid trusts

Are a combination of both, a fixed and discretionary trust, compelling the trustee to provide a fixed amount but also allowing them some scope to make distributions.

Trusts can be set up by deed during a person’s lifetime, or by will to take effect after the person’s death.  A superannuation fund is also considered a trust although they retain income and pay tax within the fund.

It is important to note that trusts are treated as a separate entity when it comes to paying tax. The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

Beneficiaries (except some minors and non-residents) include their share of the trust's net income as income in their own tax returns. There are special rules for some types of trusts including family trusts, deceased estates and super funds.

Make sure you ask a trusted adviser if you aren't sure how to action the above information, because everyone's situation is different and it can be difficult to know which option works best for you.

Have a talk with our team at BLG Business Advisers to get your requirements set up in the right way for you.

Written by Julia King . August 14, 2017
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