Trusts
24 June 08The word trust is a technical legal term which refers to a relationship under which property is held by and formally vested in one party, the trustee, as legal owner, but on behalf of other parties who are entitled to the fruits of ownership, the beneficiaries. That is, money or property is vested with an independent third party (the trustee) to administer on behalf of others (the beneficiaries of the trust).
Advantages of operating a trust include:
- Asset protection.
- Ensuring your legacy.
- Protects against asset or income testing for aged or hospital care as well as possible re-introduction of superannuation surcharge or death duties.
- Tax advantages such as income splitting.
- Risk management.
They can also be used for holding the family residence. All trusts have a trustee who monitors the trust’s activities on behalf of the beneficiaries. It is the job of the trustee to ensure that the trust operates within the guidelines of its trust deed and complies with legal requirements. The trustee is also responsible for the trust’s bank accounts and the safe custody of securities held by the trust. The trustee maintains ownership of the trust’s assets on behalf of the beneficiaries (unit holders in the case of a unit trust) and ensures that these assets are separately held and classified.
A trust deed is a document conveying title of trust property to the trustee and setting out the purposes for which a trust has been formed, the rights and obligations of the trustee, of the trust’s manager and of the trust’s beneficiaries. The trust deed lays down the rules within which the trust must operate, dictates its investment guidelines and describes how benefits will accrue to the unit holders (beneficiaries) under the trust. Basically, a trust deed is a book of rules by which the trustee must operate the trust for the benefit of the beneficiaries.
Different Types of Trusts
- Fixed Trust
Under a fixed trust the beneficiaries have a fixed interest in the assets of the trust and a fixed entitlement to income. Unit Trust A unit trust is a trust in which the property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares. In an ordinary unit trust, a beneficiary is entitled to the income and capital of the trust in proportion to the number of units held. Like a company, it is possible for a unit trust to have different types of units with different rights attached. Unlike a beneficiary of a discretionary trust, who has no property of the discretionary trust, a unit holder in a unit trust has a proprietary interest in all the property of the unit trust.
- Discretionary Trust (Non-Fixed Trust)
In a discretionary trust, the beneficiaries do not have a fixed entitlement or interest in the trust funds. The trustee has the discretion to determine which beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive. The trustee does not have complete discretion. The trustee can only distribute to beneficiaries within a nominated class as set out in the trust deed.
- Family Discretionary Trust
This is just a normal discretionary trust in which the beneficiaries are all in the one family. For example, the primary beneficiaries are usually mum and dad and their children and the general beneficiaries are their relatives. Hybrid Discretionary Unit Trust This is simply a trust in which some of the units are discretionary in nature. That is, the trustee has discretion to distribute as much of the income of the unit trust to one or more of the holders of the discretionary units as the trustee chooses. This allows the beneficiaries to have a fixed interest (by holding ordinary units) while at the same time allowing them or other beneficiaries to receive discretionary distributions of income Trading Trust Without a company attached, this is the name given to a trust that carries on a business. A trading trust can be virtually any type of trust such as a unit trust, a discretionary trust, or a hybrid discretionary unit trust etc. A trading trust is used for asset protection and income splitting. It contains business assets and suits most types of trading businesses and services, other than cases where income is from an individual’s own personal exertion. With a corporate (company) trustee This trust has a private company as its sole trustee. In a trading trust, the persons who would normally be trustee in their own name, become directors of this trustee company. Thus the company and trust structures are linked. The advantage of maximum protection for the business and for the trustee is achieved. The ability to trade with the company using a name that is completely different from the trust is achieved. The trading trust can often allocate income to various beneficiaries in a more tax effective manner.
Other Types of Trusts
- Bare Trusts
A bare trust arises where the trustee simply holds property for and on behalf of the beneficiary. The trustee has no active duties other than to transfer the property to the beneficiaries when required. The trustee is merely the nominee of the beneficiaries.
- Blind Trust or Asset Protection Trust
A blind trust (also known as an asset protection trust), is the term given to a trust in which it is not apparent who are the real beneficiaries. Apart from some charities, the beneficiaries are not named in the trust deed. Blind trusts are commonly used in international tax planning, where a trust which will derive significant income is established in a tax haven. If a discretionary trust is used and the beneficiaries are not specifically named, then the resident taxpayer can truthfully say he or she does not have any interest in the trust. As the trust deed does not disclose who the real beneficiaries are, they are also sometimes used by individuals to hide assets from their creditors, relatives or spouses.
- Class Trust
This is similar to a discretionary trust except that the trust deed provides that the income and capital must be distributed between certain classes of beneficiaries in the proportions set out in the trust deed. After the income has been distributed to the classes in the set proportions, it can then be distributed on a discretionary basis among the individual beneficiaries in each class.
- Implied or Resulting Trust
Sometimes also called a presumed trust, this trust arises by operations of law in certain circumstances. These circumstances are where there is no express declaration of trust, but the law presumes a trust was intended by the particular circumstances. A resulting trust will arise where property is transferred to a trustee for a specified purpose or period and when that purpose or period has been completed and there is property left in the trustee’s hands.
- Constructive Trust
A constructive trust is one that arises by operation of law. There is no intention by any of the parties that a trust should arise. However, the circumstances are such that it would be inequitable for the person controlling the property to deny the interest of another.
- Charitable Trust
A charitable trust is established for charitable purposes. The main differences charitable trusts have with other types of trusts are:
- Generally the rule against perpetuities does not apply to them and they may exist forever. ·
- They are trusts for purposes only (e.g. to relieve poverty) and therefore there are no specifically named beneficiaries. ·
- Because they are of a public nature, they are heavily controlled by the courts and legislation. ·
- There may be significant tax concessions.
7. Service Trust
This is a trust (discretionary, unit or hybrid discretionary unit) used to provide services to a professional practice
or other business entity. It is usually controlled by the owners of the professional practice or business entity and
is generally used for tax planning purposes to divert income from the professional’s hands into the hands of
others at lower tax rates.
8. Superannuation Funds
A superannuation fund is simply a form of trust with the members of the superannuation fund being the beneficiaries. Provided the trust deed and the operation of the superannuation fund comply with the Superannuation Industry (Supervision) Act and Regulations, then the trustee and the members may obtain tax concessions. The above list is certainly not exhaustive.
There are other forms of trusts which are currently recognised by law; a protective trust and a life estate trust being two examples.