In Australia, trust funds are among the nation's most popular investment structures. Although many folks mistakenly believe trust funds are strictly enjoyed by the super rich, in reality, even moderately well-to-do individuals can use trusts to protect their personal, family and business assets (see How to Set Up a Trust Fund If You're Not Rich). But setting up a trust fund can be a complicated effort. Therefore, it's vital to proceed with caution and purpose.
What Is a Trust Fund?
The word “trust” is an umbrella term used to signify a variety of structures--each with its own specific procedures, regulations, and tax considerations. But fundamentally speaking, a trust is a private legal arrangement in which the ownership of one’s assets, such as stocks, bonds, cash, real estate, antiques, and fine art, are parked in an account that's managed by an individual, or group of individuals, for the benefit of another person or persons. The individuals who originally provide the assets are generally referred to as settlors. Those charged with managing trusts and distributing their assigned assets are known as trustees. Finally, those who ultimately receive the assets contained within the trusts are known as beneficiaries.
- In Australia, the trust fund is a key structure to make sure individuals safely pass on their assets to their chosen beneficiaries.
- A trust is a great tool for segregating a person's assets from his estate or portfolio, effectively shielding those assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits.
- The assets in a trust may contain stocks, bonds, cash, real estate, antiques, and fine art.
Why Create a Trust?
Trusts are mainly created to segregate a person's assets from his or her personal estate. Once a settlor assigns those assets to a trust, he or she no longer owns them, effectively shielding the assets from creditors in bankruptcy proceedings, or plaintiffs in lawsuits. (For more, see Advanced Estate Planning: Using Trusts).
Other reasons for creating a trust include:
- Controlling the assets of individuals who are too young or incapacitated to handle their own financial affairs
- Protecting spendthrifts from squandering their fortunes
- Managing and distributing pension/retirement funds during an individual’s employment years.
Types of Trusts
Australia recognizes the following different types of trusts:
1. Family/Discretionary Trust
A Family Trust (also known as a Discretionary Trust), one of Australia’s most common small business structures, is ideal for families with private businesses and other income-generating operations. Such trusts give trustees the discretion to decide who receives distributions, and how often payouts occur. Accepted in every Australian state, Family Trusts are relatively easy to establish and operate.
2. Unit/Fixed Trust
A Unit Trust (also known as a Fixed Trust) differs from a Family Trust in that the trustee generally does not hold discretion over the distribution of assets to beneficiaries. These structure divide the trust property into units, similar to shares of stock. Each beneficiary (known as a "unit holder") owns a given number of those units, and at the end of each year, he or she receives a distribution from the trust, based on the number of units held. Ideal when multiple families are involved, Unit Trusts operate somewhat like a company.
3. Hybrid Trust
A Hybrid Trust bears characteristics of both Discretionary and Unit Trusts, whereby the Trustee is empowered to distribute trust income and capital among nominated beneficiaries--as with Discretionary Trusts. However the income and capital is proportionally distributed--as with Unit Trusts, based on the number of units each beneficiary holds. Hybrid Trusts are often the favored structures when there are significant investment assets involved, due to their income tax and capital gains tax benefits.
Establishing a Trust
Setting up a family trust is a straightforward process, that may be done online for a small fee of about $150, plus the Stamp Duty--a state-based tax. Slightly more complicated structures that require the active management of a corporate trustee can start at around $1,200.
In establishing trusts, settlors must take the following steps:
Step 1: Decide Upon Original Trust Assets
List all the holdings, along with their current value, to be placed in trust.
Step 2: Appoint Trustee(s)
Designate an individual or financial institution to serve as trustee. Choose wisely, as this person/entity will wield significant legal authority and control over your trust assets.
Step 3: Determine Beneficiaries
Compile a list of people or entities entitled to receive benefits. Include the percentage breakdown of assets intended for each recipient.
Step 4: Draft Trust Deed
A trust deed is a legal document prescribing the rules that govern your fund, and the powers of the appointed trustee. It includes the fund’s objectives, specifies original trust assets, identifies the beneficiaries, delineates how benefits are to be paid (either via lump sum or an income stream), details how the trust may be terminated, and establishes rules for operating the trust bank account. Trust deeds must be signed and dated by all trustees, executed according to state or territory laws, and regularly reviewed and updated as required. Deeds should be crafted by professionals with specialized legal and financial knowledge of trusts.
Step 5: Stamping
Stamp Duty--a state-based, tax may be payable on the trust deed, depending on the state or territory. Stamping can be arranged directly through the relevant revenue authority or via a lawyer or accountant in your given state or territory.
Step 6: Register as a Business
As with other Australian business structures, you will need an ABN (Australian Business Number), TFN (Tax File Number) and a business name for the trust. Depending on the trust type and complexity, you may be required to register it as a company.
Step 7: Open a Bank Account
Once the trust has been established, a trust bank account should be opened in the trustee’s name. The bank may require personal details about the trustee(s) and other parties involved, before it will open the account.
Step 8: Commence Trust Activity
Once the bank account has been established, the trust becomes operational and can accept contributions or make investments, subject to terms outlined in the trust deed.
The Bottom Line
Trusts have become a common way of structuring financial affairs, and a logical, tax-efficient means of distributing earnings that protect wealth for future generations. It's critically important to crystallize legal relationships and obligations associated with any trust, because they are typically irrevocable. While online platforms can offer some guidance, seeking professional advice from a lawyer, accountant or tax advisor is highly recommended.
[Important: Since trustees of discretionary trusts have wide powers, it is essential to choose a responsible and impartial individual to embody this position. For this reason, it may be best to appoint an independent trustee, who has no allegiance to any of the beneficiaries listed in the trust deed document.]