How to set up a Trust Fund

What is a Trust Fund? How does it work?

A trust fund is where your assets are placed into an account that is held by another person. This is so other people can benefit from it other than the original owner. You don’t need to have major assets to have a trust fund. Trust funds can hold multiple kinds of assets. These include:

• Real estate;
• Property;
• Stocks;
• Cash;
• Bonds;
• Items of high value (such as antiques or fine art).

When you create a trust fund certain assets are placed into an account that is managed by an individual or a group of individuals. The person or entity in charge (the trustee) is responsible for overseeing the trust and distributing the assets. The trust must contain a clear outline the terms and structure of the trust:

• The purpose of the trust
• How benefits will be paid to beneficiaries
• Who the trustees are
• Who the current beneficiaries are
• Who can be a beneficiary in the future

This makes sure individuals can safely and securely pass on their assets to the people who deserve them most.

Another way trust funds can be used is for separating a person’s assets from their estate or portfolio. This is because a trust is not a separate legal entity under Australian law. It is an estate-planning tool that puts a person or entity in charge of holding an individual’s assets for the benefit of another person or people.

How do you set up a trust fund?

When setting up a trust fund, you need to first identify the parties involved. They include:

• Settlors: the person/people who establish the trust.
• Trustees: the person/people who manage the trust (and eventually distribute the assets).
• Beneficiaries: the person/people who receive the assets from the trust.

Then, when it comes to setting up the trust fund, it is relatively straightforward.

1 – Decide which assets you want in the trust fund

You want to ensure that you include the specific assets you want in your fund, and their value.

2 – Choose a trustee

While it could be anyone you choose, you still want to make sure that your assigned trustee is a person you believe will act fairly and impartially to avoid a conflict of interest.

3 – Choose your beneficiaries

You need to decide who will receive the contents of your trust fund. You may also want to consider how much the beneficiaries will receive as a set amount or percentage.

4 – Create a trust deed

A trust deed must be included in all trust funds in Australia. This s a legal document which includes:

• The rules of your trust; and
• The powers the trustee has.

It’s important to include a trust deed in the terms and structure of your trust because otherwise it will be difficult to set up the trust fund. To ensure you do this correctly, we recommend seeking assistance from a lawyer or an accountant.

5 – Settle and sign the trust

For the trust deed to be valid the settlor and everyone listed as a trustee must sign it.

6 – Pay stamp duty

Depending on the state you’re living in, stamp duty may apply when you establish a trust. It is important to allow yourself enough time and additional funds to meet those payment requirements.

7 – Create a Tax File Number(TFN) or Australian Business Number (ABN)

A trust must have its own tax file number for Australian tax purposes. This number will be used by the trustee to lodge income tax returns for each financial year. If the trustee is engaging in business activities using the trust it will also need an Australian Business Number. This includes making investments or trades, or operating a business.

8 – Open a bank account

The bank account should be opened under the name of the trustee.

9 – Commence trust activity

Once the bank account has been opened, the trust fund becomes operational, and you can accept contributions or make investments. These must be done according to the terms in the trust deed.

How do trust funds pay out?

There are multiple ways that trust funds can pay out. This will depend on what trust you have decided to set up. There are several different types of trusts that individuals could use. They include:

1. Discretionary family trusts: trusts used to hold family assets or conduct a family business.

2. Fixed trusts: a trust where the benefits (the assets and/or income) are fixed. This means that the trustee has no discretion on how it is distributed.

3. Fixed unit trusts: like a fixed trust except the capital and income among the beneficiaries is shared based on how many units they have in the trust.

4. Testamentary trusts: a trust set up in the event of your death and established under the terms of your will.

5. Special disability trusts: a trust to plan for the long-term care and accommodation needs of someone with a severe disability.

6. Charitable trusts: used to support a variety of charitable organisations.

7. Superannuation proceeds trusts: a trust that contains the deceased’s superannuation death benefits. This protects the death benefit from third parties who may try to access the funds.

The Benefits of a Trust Fund

Setting up a trust provides a wealth of benefits for both the creator and the recipients of the trust. The main advantage of using a trust is that any accumulated wealth is properly controlled so that the recipients receive the most benefits. Some of the other reasons for establishing a trust include:

• Providing for family members: a trust fund for individuals can be a way to ensure that their assets are properly held, gathered, and distributed in the future. A trust fund allows the individual to maintain a level of control over how they want their assets to be managed.

• Protect wealth for future generations: a trust fund minimises the risk of family disputes over inheritance.

• Protecting assets from creditors or lawsuits: a trust fund could also be created to separate a person’s assets from their personal estate. For instance, if there was a claim made against you in your own business, the assets would not be in your name. Instead, the assets would be under the name of the trustee.

• Tax purposes: The main benefit of placing assets in a trust fund is that the income generated by those assets can be distributed to beneficiaries at the tax rates which apply to them.

Final Considerations

Trusts have become a common way of managing financial affairs, and a logical, tax efficient way to distribute earnings. They are an effective financial tool to protect someone’s wealth for future generations and maintain familial relationships. However, while trust funds can be simple to set up, it is crucial for them to be done correctly. So while many online platforms offer general guidance, it is highly recommended you seek professional advice if you are contemplating setting up a trust fund.