FAQs - Trusts

A trust, contrary to a commonly held belief, is not a separate legal entity. It simply describes a relationship in which one person holds property for the benefit of another. There are many possible variations to this basic principle, for example, one person may hold property for many others.

In Estate Planning, trusts are usually used as a way to manage tax, protect assets or plan out distribution of the assets. Trusts are a very effective strategy that ensures that the wishes of the planner are carried out, and that the assets of the planner are safe and able to continue to generate wealth.

Trustee – This is the person who legally holds the assets of the trust. This does not mean that the Trustee may do whatever they wish with the assets. They must always act in the best interests of the beneficiary. Acting as Trustee is rarely a simply undertaking and can expose a person to significant risks.

Beneficiary – The beneficiary is the person or persons who are to benefit from the Trust. In an Estate Planning context, this will usually be the children and grandchildren of the Estate Planner, although this does not necessarily need to be the case.

Appointor – An appointor’s role will be to appoint or remove the Trustees. The Appointor has a lot of power, as they control who is to be the decision-makers of the Trust. An Appointor may wish to exercise their power if the Trustee dies, is not acting in the Trust’s best interests or if unable to continue acting as Trustee.

Settlor – The settlor of the Trust will place the first property into the Trust. For tax reasons, the settlor should not be a beneficiary of the Trust, and will usually have a very limited role. Usually, the settlor will place a small sum of money into the Trust, such as $10, and will have no involvement after the gift is made. A settlor will often be the accountant or lawyer of the Estate Planner.

The Trusts Act 1973 (Qld) grants trustees the power to sell, mortgage, lease, insure, repair or improve trust property. They may hold the property for a significant amount of time, so they are given these powers to ensure that the wealth of the Trust is maintained or improved upon.

The Trust Deed will usually grant the Trustee with powers in addition to these prescribed powers.

Acting as Trustee imposes certain legal obligations and with it, certain legal risks.

As a general principle, Trustees must act in good faith and in the best interests of the Trust and the beneficiaries. The Trustee must also preserve the property of the trust, keep records, communicate with beneficiaries and not be deceitful. There are also duties to avoid conflicts of interest and not to exploit the Trust property for personal gain.

There are many other legal obligations imposed on a Trustee, some of which may be set out in the Deed.

A Trust can last for up to 80 years. However, many Trusts will allow a Trustee to terminate the Trust at an earlier time. Upon termination, all Trust assets will be distributed to the beneficiaries.

The Trust Deed is the legal document that sets out the operation of the Trust. It will usually set out the objectives of the fund, the beneficiaries, the powers of the Trustee and the ability for the Trustee to vary the terms of Deed itself.

Trust Deeds are complex legal documents and if they are drafted incorrectly, can restrict the Trust from operating as intended.

In Australia, the use of Trusts as a mechanism for effective Estate Planning is very common. This is generally because of the following reasons:

1. Asset protection: Assets held in a family trust may be protected from certain parties. This is because a beneficiary of a Trust does not legally own the property of a Trust, but rather has a “mere expectancy”. In the case of bankruptcy, or a relationship separation, trust property will not be included in the asset pool. So for example, if a parent sets up a Trust of which their child is a beneficiary, and the child separates from their spouse, the spouse cannot usually make a claim against the assets of the estate. This is a general rule, and many circumstances may be taken into account in such a claim.

2. Managing tax: Trust income may be distributed in a way that is more tax effective if it is distributed to beneficiaries in a lower marginal tax range.

3. Flexibility and distribution planning: Trusts allow for a lot more flexibility when it comes to how the assets of the Trust are distributed, who receives the assets and when, and who is in control of the property. It also allows for the Trust property to benefit several generations without requiring a transfer of ownership from one individual to the next.

Generally, yes. However, doing so will make it more difficult to argue that the property of the Trust is not an asset of the beneficiary, as such a person in these circumstances also has the control of the assets. This is usually inadvisable as one of the main benefits of the Trust is for the protection of assets (See above: “What are the benefits of a Trust in Estate Planning”).

While the trustee may also be a beneficiary, they cannot be the sole beneficiary, unless there is more than one trustee.

A Corporate Trustee will be an Australian company that operates as Trustee of a Trust. Often, a Corporate Trustee will be set up solely to act as Trustee.

There are several reasons that a person may wish to set up a company to act as a Corporate Trustee. The main benefits are asset protection and limited liability.

Setting a Trust up in this way protects the assets of the Trust as a company acts as an extra degree of separation. A trust’s assets may be construed as being owned by an individual trustee in their personal capacity. This negates a large benefit of the Trust, to protect the assets against creditors. A Corporate Trustee may be used as evidence that a person does not actually own the assets of the Trust, because the Company is in control.

With regards to limited liability, an individual Trustee will be personally liable that arise from acting as such. A Corporate Trustee will therefore usually limit this liability to the assets of the Trust.

A Testamentary Trust is a trust you put into place as part of your Will. Unlike a Family Trust, a Testamentary Trust only comes into effect after you die. Testamentary Trusts come in many forms, including protective (for vulnerable beneficiaries) and discretionary (to give beneficiaries choice).

A Testamentary Trust may allow a Trustee to split the income earned in the Trust to different beneficiaries. This can allow for sizeable tax savings, especially for minors who are eligible for much greater tax concessions in the Testamentary Trust.

There are significant advantages and disadvantages to Testamentary Trusts that you should consider. To make sure you are fully informed on the subject, click here to make a booking.

Protective Trusts are designed to benefit your loved ones who may not be able to look after their financial affairs. There are many reasons the law may recognise a beneficiary as vulnerable for the purposes of a Protective Trust. They include your underage children, those who have a cognitive or physical disability, those struggling with addiction or those who are bankrupt.

If you have a beneficiary that receives a Centrelink Disability Pension, we can help draft a Will to avoid them losing that benefit.

After you die, and you have placed a Protective Trust in your Will, your inheritance will be held within that trust. You can nominate a person or an entity to control that trust after you die for the benefit of the vulnerable beneficiary. The Trustee may be a relative, a loved one or a Trustee Company. The Trustee is bound by the laws of Protective Trusts, which is structured around protecting the vulnerable person.

Click here to read about Special Disability Trusts, which may be applicable to your circumstances, or click here to make a booking with us.

A Discretionary Trust will not have any fixed entitlements or interests for beneficiaries. The Trustee will have control over the trust and may even be a beneficiary themselves. They can control the Trust to benefit themselves and other beneficiaries. They offer a greater level of flexibility among other trust types.

While there is more flexibility in a Discretionary Trust, they are subject to regulatory obligations. To find out whether a Discretionary Trust is suitable for your situation, click here to book a time with us.

A Family Trust is a kind of discretionary trust where a trustee is appointed to manage the trust on behalf of its beneficiaries. A Family Trust is something that you must set up before you die.

An appointor takes ultimate control with the power to appoint and remove a trustee. This kind of trust allows beneficiaries to have assets and income managed for them. A Family Trust is afforded a range of benefits including tax minimisation and asset protection. A Family Trust does not form part of your estate and can be used to protect your estate from legal claims.

If you need help to decide whether a Family Trust would be a good idea for you, click here to book an appointment with us.

Special Disability Trusts (SDT) are regulated by the government and provide a trust for the benefit of someone who meets the legislative disability requirements. Trustees of an SDT control the fund only for the benefit of a disabled beneficiary. An SDT may be placed in your Will.

The main advantage of an SDT is that assets (up to a certain amount) are free from Government income and asset tests for disability pensions. However, SDTs are also subject to increased Government scrutiny, and you will have less control of the Trust and how you spend money for the beneficiary.

To discuss whether an SDT will work in your circumstances, book an appointment with us here.