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The ABCs of Trusts
Acis, current as of: 28 July 2016.
A trust is simply a fiduciary relationship recognized by law. It requires some form of property/asset to be held by a person or company (the trustee) who is obligated to deal with the property for the benefit of other persons (the beneficiaries).
A trust is not a legal entity in itself, but creates obligations to consider the interests of beneficiaries when using or dealing with the trust property.
A trust may be created in a number of ways, but most commonly it is created by the trustee signing a trust deed that sets out the conditions of the trust and how the trustee may act.
The most common form of trust used in Australia is called a discretionary or “family” trust. Other common forms are unit trusts and hybrid trusts.
Trusts are usually used as a business structure for operating a trading enterprise or as an investment vehicle for buying and selling assets (e.g. shares, real estate) with a view to making a profit.
Why Establish a Trust?
The primary reasons why trusts are popular are:
- Asset protection – because the trust’s assets are held by the trustee in a fiduciary capacity, they are protected from the trustee’s and beneficiaries’ personal creditors; and
- Tax planning – using a trust allows flexibility in the distribution of income to the beneficiaries each year to achieve the best tax outcome. Distributing income from the trust to a beneficiary who is in a low tax bracket can reduce the amount of tax payable on the income generated.
Of course these are only general rules and exceptions will arise from time to time.
Some expertise in setting up and operating a trust is required in order to achieve effective asset protection or tax planning. Equally, a thorough knowledge of the terms set out in the trust deed is critical to achieving those aims.
Failing to fully appreciate the need for the effective establishment and operation of a trust or its terms can mean that neither of the above aims are met, leading to disastrous results. Potentially the assets of the trust are exposed to personal creditor’s claims and/or more tax is payable than would otherwise be the case.
The value of trusts as part of an overall asset protection strategy is covered in our recently released “Separation Anxiety” white paper. Simply register to download your complimentary copy.
If you have any questions relating to trusts and would like to get in touch, feel free to call us on 1800 773 477 or contact us via email.