
Setting up a Trust is an important decision to make. In many ways, it can be beneficial to have a trust. But like anything else, it’s essential to understand why and how you should have one. In this resource we discuss what a Trust is and why you may need to set up one.
What is a Trust?
According to Australian law, a Trust is an estate-planning tool that declares one entity or individual (known as the trustee) responsible for holding and managing another individual’s (known as the beneficiary) assets in an account for their benefit.
A Trust is set up through a legal document referred to as a ‘trust deed’. The deed details the Trust’s purpose, who the trustees and beneficiaries are, what assets they will hold, and information about when and how the benefits will be conferred to the beneficiaries.
Why do people set up a Trust?
Several people who have heard of trusts have heard about them in the context of high net worth individuals setting up Trust funds for themselves and their families. In reality, however, trust funds are not just limited to wealthy individuals managing their finances. Today, trust funds are used by people of various backgrounds to protect their assets for their next and future generations. Here we will detail some common reasons why a Trust may be set up.
- Providing for family members – A Trust can be set up for the safekeeping of assets for family members. Individuals can choose their beneficiaries and the way assets will be released to them. The level of control ensures that the assets cannot be misused and beneficiaries not exploited.
- Protecting assets from creditors, lawsuits – If you choose to put some of your assets in a Trust fund, they no longer remain your property. Instead, they now belong to your beneficiaries. In case you go bankrupt, insolvent or have any other lawsuit against you, these assets cannot be seized as they are not legally your property. This way, some of your assets are safe from being accessed for payback purposes.
- Tax purposes – If the Trust holds any assets that generate income, the tax burden will not be on you, instead, it will be on the beneficiaries. Minors and retired senior citizens are subjected to lower tax rates, resulting in tax savings for you. However, it is advisable to speak to a tax professional before you opt for such a solution.
- Preventing people from challenging someone’s will – If an individual sets up a Trust creating provisions for all their beneficiaries, there are reduced chances of said beneficiaries contesting the will. The provisions may not be equal for all.
- Protecting the assets of not-of-age individuals or incapacitated ones – Trust funds are a common way of protecting the assets of those who lack the maturity and sense of dealing with the assets themselves. In such cases, the trusts often release funds periodically, effectively managing the upkeep of such individuals.
Types of Trusts in Australia
We know that the trusts may be set up for multiple reasons. But it is also important to know which type of Trust you need to step up to get the maximum benefit. Below are the most common types of trusts set up in Australia and the purposes they serve.
Family trust
A family Trust includes a number of beneficiaries who are all family members and associated persons. The assets are shared under the Trust to protect them in cases of unlimited liability of any of the individuals. Shared ownership also reduces the tax burden on a single family member and is a secure way of keeping the family’s income-generating assets. It also proves advantageous when splitting the assets between the family members.
Unit or fixed trusts
A fixed Trust is one in which the Trust releases set and specific portions of income or benefits to the beneficiaries. The portions are set and the trustee has no discretion over varying the amount awarded to the beneficiaries at one time.
A unit Trust is a slight variation of a fixed trust. In this situation, the entire Trust amount or estate is divided into a number of units. The total number of the units cannot be changed but the number of units awarded to the beneficiaries can differ. The trustee has the power to determine the distribution of the units between the benefitted individuals. For example, they may choose to award more units to one person than another.
Hybrid trusts
A hybrid Trust combines the best of both worlds – discretionary and unit trusts. The estate award is split into units with the trustee having the legal power to issue these units at their discretion.
Special disability trusts
The special disability trust is set up to care for the disabled. The Trust is set up by family members or caregivers to provide for those who are unable to do so for themselves. The Trust ensures a steady provision of income, accommodation, care and government benefits for the disabled without any hassle.
Testamentary trusts
A testamentary Trust is one that is established under a will. It comes into effect until the person who’s made the will passes away. After the demise, the trustee holds the estate for the duration until the property can be conferred to the beneficiaries. A testamentary Trust can be for a short period of time if the administration is done quickly under the specified conditions. However, it may even last years in cases where the trustee must hold the property until the beneficiaries come of age or any other conditions set are met. The Trust is dissolved when the will has been completely administered.
Charitable trusts
Charitable trusts are ones that include charitable organisations or non-profit organisations as their beneficiaries. They are often set up and contributed to by people during their lifetime and might be included in the will. People choose to dedicate some money to close persons and individuals (often family members) and the rest of the money to charities and funds of their choice and preference after their demise. They can determine the timeline of the release of the funds.
In Summary
- Trusts are a legal way of managing and protecting assets, providing steady streams of income for family members and those incapable of taking care of their own.
- They are also often used for reducing tax burdens and safeguarding assets from being seized in cases of financial trouble.
- There are various types of trusts that can be set up. These vary in terms of purpose, the release of funds, types of beneficiaries and time periods.
- The setting up of trusts is now no longer restricted to the elite of the society. Relatively well-to-do individuals can set up trusts for their preferred reasons. However, it is best to consult professionals when deciding the terms of the deed and deciding what Trust to set up in line with the purpose they want to achieve.
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Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.