What is a trust?
Put simply, a trust is a relationship between 3 people: a settlor, a trustee and a beneficiary. Despite what many believe, it is not something just for incredibly wealthy families, and also not just for an entity like a company is. Here is a simple explanation into the different components that make up a trust and their responsibilities.
A trust is a written agreement outlining the rules for property for the benefit of others. There are three important requirements for an agreement to be a trust, these are:
- the intention of the trustor;
- the subject matter; and
- the object (or beneficiary/beneficiaries).
Trusts are useful for a wide range of business and personal reasons, and one of the more frequent reasons being that they are a commonly used vehicle through which to operate a business and hold property apart from the family home.
Why would you set up a trust?
There are a number of advantages in setting up a trust, including:
- A trust provides asset protection and limits liability in relation to the business.
- Trusts separate the control of an asset from the owner of the asset and so may be useful for protecting the income or assets of a young person or a family unit.
- Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the distribution of income and capital gains among beneficiaries.
- Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or partnerships.
- Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates.
Who is a trustee in a trust?
A trustee is the person in charge of the trust. They manage the trust’s assets, do business on behalf of the trust and distribute any income that asset earns to the beneficiaries during the life of the trust. There can be more than one trustee; however, there must always be at least one.
The nominated trustee can be yourself or a stand-in for yourself when you are no longer able to manage your assets. Therefore, you need to nominate a trustee who is:
- familiar with you, your financial situation, and your chosen beneficiaries;
- has a good grasp of financial management, including taxes and investments; and
- is able and willing to devote the time and effort to overseeing the trust, making distributions as required, and meeting all tax deadlines.
Who are beneficiaries in a trust?
A beneficiary has no control over how the trust operates or ownership of its assets. A beneficiary is the person/s for whom the asset (for example, property or money) is held in trust for and will receive a benefit from the trust. There can be numerous beneficiaries; however, there must be a minimum of one.
Takeaway message about trusts
Trusts are complex and commonly disputed – especially when families break down. It is incredibly important that trusts are set up correctly from the beginning to prevent flow-on implications down the track causing confusion and conflict between the trustee and its beneficiaries. As well as this, regular maintenance of the trust must also be undertaken to ensure it is up to date.
If you would like to talk to someone about setting up a trust, or your rights as a beneficiary of a trust, please reach out to our experienced team of lawyers.