What is a Trust?

Trusts are one of the most common wealth management tools used by Aussie families. We look at why they’re so popular and how to set them up.

Trusts are often thought of as complex legal arrangements used exclusively by the super-wealthy. In fact, Trusts are in widespread use amongst Australian families as simple and cost-effective structures for managing their financial affairs.

Trusts can be thought of as both a tool to maximise assets, and a shield against liability for debts and taxes.

They’re also the perfect way to guard against funds being squandered by big-spending or wayward family members, and they provide a safety net for Beneficiaries with special needs.

The two biggest benefits of Trusts are:

• They give you control over the distribution of family assets and income

Unlike giving an outright gift, or leaving something under a Will, a Trust puts conditions on how funds, assets and property are used. An easy way to understand them is to think of Trusts as being “gifts with strings attached”.

• They provide benefits for wealth management and estate planning

The property in a Trust is separate from the Grantor’s (the person setting up the Trust) personal asset pool. The Trust becomes the legal owner of the property and this means that it can be safe from bankruptcy proceedings and lawsuits against the Grantor. Another major benefit is that Trust income can be distributed evenly amongst Trust members to effectively manage tax liability.

We look at the common types of Trusts in Australia and what the essential steps are for setting one up.

How does a Trust work?

In basic terms, a trust is a legal obligation where the person setting up the Trust (the Donor, or Grantor) gives property to the person in charge of the trust (the Trustee) to hold on behalf of others (the Beneficiaries).

The property of the Trust can include a combination of things - cash, shares, real estate and other physical goods.

A Trust Deed is required to establish the rules and relevant parties to a Trust (including the Trustees and Beneficiaries). Once the Trust Deed is in writing, legal ownership of the property is transferred to the Trust and the Trustee can start to accept contributions, invest funds and make payouts according to the terms outlined in the Deed.

What are Discretionary Trusts?

“Discretionary Trusts”, also known as “Family Trusts,” are the most common form of Trust in Australia. They’re ideal for families with businesses or other income-generating activities and they’re typically established by a key family member for the benefit of other members of the family group.

The reason this type of Trust is called “discretionary” is that the Beneficiaries and the amount they receive are not stated in the Trust Deed itself.

Instead, the Trustee is given the freedom - or “discretion” - to make these decisions and distribute and income independently. Naturally, there will be factors limiting their powers, such as:

• Beneficiaries have to be individuals defined in the Trust Deed
• Amounts paid out must be within the overall limits outlined in the Trust Deed.

In practice, this gives the Trust flexibility to adapt to changing circumstances, for example when new assets or Beneficiaries are added. It also provides a tax efficient way to distribute income amongst a group of people or family members.

The opposite of a Discretionary Trust is a “Fixed” or “Specific Trust”. This is where the Trust Deed spells out who the Beneficiaries are, and what entitlements they should receive. It leaves the Trustee with a purely administrative role in carrying out the instructions of the Trust.

What are Testamentary Trusts?

Trusts can operate while the parties are living (Inter Vivos Trusts) or after the death of the Donor (Testamentary Trusts).

Testamentary Trusts are created through a Will. They’re similar to other types of Trusts in that assets are held under the control of a Trustee who will eventually distribute them to a group of Beneficiaries.

The three major benefits of Testamentary Trusts is that they provide:

• a tax efficient distribution of an Estate in the case where large sums of money or income producing assets are involved
• a safeguard against loss of family wealth due to youth and inexperience of Beneficiaries, or threats from third parties (such as ex-partners or through litigation)
• a safety net for dependents who are ill or incapacitated in some way.

The way that Testamentary Trusts usually operate is much the same as Discretionary Trusts, and they’re an equally popular way to control and protect family wealth as it passes through generations.

How to set up a Trust

There are a number of ways to set up a Trust ranging from using a do-it-yourself (DIY) online service to having an accountant, solicitor or financial advisor create one for you.

Whichever method you choose, setting up a Trust requires some careful thought and planning. These are the main steps involved in setting up a Trust in Australia:

Step 1: Decide what assets will form part of the Trust

Work out which property and assets will go into the Trust, along with the current value of each item.

Step 2: Appoint a Trustee and identify the Beneficiaries

A Trustee is an important position that requires integrity and effective management skills. Choose someone who is honest, independent and has the necessary skills to effectively administer the Trust. This should be someone who has each of the Trust parties’ best interests at heart and will not be biased towards any one of them, or make decisions based on personal emotions or conflicts.

Make a list of who you want to benefit from the Trust, and in what amounts or percentages.

Step 3: Create a Trust Deed

The Deed should contain at least the following basic specifications:

• the Trust’s objectives
• what the original assets are
• the list of Beneficiaries and methods of payment
• how the day-to-day administration of the Trust should be carried out.

Step 4: Complete the final administrative requirements for a working Trust

• sign and date the Trust and find out if you need to pay any stamp duty on it in your state or territory
• register the Trust as a business by applying for an Australian Business Number (ABN) and Tax File Number (TFN)
• open a bank account in the Trustee’s name.

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