What Is an Inter Vivos Trust?

Inter vivos” is a Latin term which roughly translates to  “between the living.” An inter vivos trust is simply a trust that is created and takes effect while the person who sets it up (the settlor) is still alive.

This is different from a testamentary trust, which is created by a Will and only comes into effect after death.

How Does an Inter Vivos Trust Work?

An inter vivos trust is a legal arrangement where a person (called the settlor) transfers assets like property, shares, or cash into a trust during their lifetime.

Once the trust is created, a trustee is responsible for managing those assets according to the rules in the trust deed, which is a legal document that sets out how the trust works.

Here’s how the key roles break down:

• Settlor– the person who sets up the trust and puts the initial asset or amount into it.
• Trustee – the person or company that legally owns and manages the trust assets.
• Beneficiaries– the people or entities who benefit from the trust (for example, by receiving income or support).
• Trust Deed– the written document that outlines the powers of the trustee, the purpose of the trust, and how income or capital is to be distributed.

The trustee makes decisions about how the trust assets are used. However, they must always act in the best interests of the beneficiaries and in line with the trust deed.

In New South Wales, the Trustee Act 1925 (NSW) also sets out certain duties and powers of trustees, but the trust deed is the set of rules that dictates the administration of the trust.

Types of Inter Vivos Trusts

There are several types of inter vivos trusts, depending on your goals:

1. Discretionary (Family) Trusts

Often used by families and small businesses, these trusts give the trustee discretion to decide how income and assets are distributed among the beneficiaries. They can offer flexibility and tax planning advantages.

2. Unit Trusts

Each beneficiary, known as a unit holder, holds a fixed interest in the trust. Unit trusts are common in joint business or investment arrangements, where ownership and profit shares need to be clearly defined. They are also commonly used for real estate investments to minimize land tax.

3. Hybrid Trusts

These combine features of both discretionary and unit trusts. Some entitlements are fixed (like in a unit trust), while others are distributed at the trustee’s discretion.

Why Set Up an Inter Vivos Trust?

There are many reasons why people in NSW choose to establish an inter vivos trust. These include:

• Asset protection – to protect assets from creditors, legal claims, or financial disputes
• Tax planning– to distribute income across family members in a tax-effective way
• Estate planning – to pass on wealth during your lifetime while keeping control
• Caring for dependants – to provide structured support for children or people with disabilities
• Business succession – to help with the smooth transfer of business ownership or control

That said, trusts are not suitable for everyone. They come with legal obligations, and the tax implications can be complex so it’s essential to seek professional advice before setting one up.

What Are the Trustee’s Legal Duties?

Trustees of inter vivos trusts have serious legal duties. These include:

• Acting in the best interests of all beneficiaries
• Following the terms set out in the trust deed
• Keeping accurate financial records
• Managing trust assets with care, honesty, and diligence

Under the Trustee Act 1925 (NSW), trustees can be held personally liable if they breach their duties. That’s why many people choose to appoint a professional or corporate trustee to manage the trust properly.

Do You Need a Lawyer?

Probably, because a trust is a legal structure, it’s advisable to have a lawyer draft or review the trust deed. This ensures the trust:

• Accurately reflects your intentions
• Complies with NSW legislation
• Is structured to suit your personal, financial, or business needs
• Avoids potential tax or legal pitfalls

A poorly drafted or invalid trust deed can result in disputes, financial loss, or the trust being unenforceable which can defeat the entire purpose of setting it up.

Contact us for a free thirty-minute consultation with a estate planning lawyer.

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.