Why set up a trust?

There are many reasons someone would choose to set up a trust. These include:

• To separate the owner of the asset (the beneficiary) and control over that asset (the trustee), for example. where the beneficiary is under age or suffers from a disability that affects their decision making
• To provide greater flexibility in tax planning
• To protect assets from financial claims made against the beneficiary, and
• To use as a business entity either for investing (for example, to purchase real estate or a share portfolio) or for trading.

What does a trust need?

Any trust needs a number of elements before it can start operating:

The settlor: The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons, the settlor should not be a beneficiary under the trust.

The trustee: The trustee (or trustees) administers the trust. The trustee owes a duty directly to the beneficiaries and must always act in their best interests. All transactions for the trust are carried out by and in the name of the trustee.

The beneficiary or beneficiaries: The beneficiaries are the people or companies for whose benefit the trust is created and administered. Beneficiaries can be either primary beneficiaries (who are named in the trust deed) or general beneficiaries (who often are not named individually). General beneficiaries are usually existing or future children, grandchildren and relatives of the primary beneficiaries.

The trust deed: The trust deed (or, in the case of a testamentary trust, the will) is the formal document which sets out how the trust will run and what the trustee is allowed to do. It is very important that the trust deed or will is drafted by a solicitor.

The appointor: Many, but not all, trusts also have an appointor. The appointor is very important as they have the power to appoint and remove the trustee.

What different kinds of trusts are there?

There are many different kinds of trust. As well as the types of trust described below, trusts include superannuation funds, charitable trusts and special disability trusts.

The two main types of trusts which are used in business and by individuals are:

Discretionary (or family) trust:

A discretionary trust or family trust is the most common form used by families. The beneficiaries of the trust have no defined entitlement to the income or the assets of the trust. Each year, the trustee decides which beneficiaries are entitled to receive the income and how much they should get. For this reason, discretionary trusts have become popular in family tax planning.

Fixed or unit trust:

Unlike a discretionary trust, the beneficiaries of a fixed trust have a defined entitlement under the trust, similar to a shareholder in a company. This is usually done by dividing the trust into units in much the same way a company is divided into shares. The trustee does not have any discretion as to how they distribute the trust’s capital and income. A fixed or unit trust is often used for joint venture arrangements – for example, two families want to own an asset together.

How long does a trust last?

In NSW, a private trust can last for up to 80 years. The trust deed will set out how long it should last and can specify a shorter term – often based on a specific event happening, such as someone dying or reaching a certain age. The date when a trust reaches the end of its term is known as the ‘vesting date’.

What happens on the vesting date?

When a trusts vests the beneficiaries become absolutely entitled to all of its assets and income. The trustee must distribute all assets and income to them in line with the trust deed. A trust deed will usually have a set of rules the trustee must follow when doing this.