Trusts

A trust is a legal arrangement whereby a trustee (a person or a company) holds property or assets for the benefit of others, known as the beneficiaries. This is a fiduciary relationship, which means the trustee must act in the best interests of the beneficiaries, adhere to the trust deed, and must avoid any conflicts of interests. The trustee must administer the trust pursuant to the terms set out in the instrument, usually a trust deed or a Will. Trusts are also governed by laws such as the Trustee Act 1925 (NSW) along with state and federal tax law. Trusts can be used for a variety of purposes such as business, estate planning or for charitable giving. Whilst a trust in itself is not its own legal entity, it is usually treated as one under tax law and requires a tax file number.

Trusts can be established during a person’s lifetime through a trust deed or after their death by their Will. The person contributing the initial assets to the trust is known as a settlor. The settlor usually identifies the beneficiaries of the trusts, appoints a trustee and contributes the initial sum into the trust creating the trust obligation. An appointor may also be nominated. An appointor holds the power to appoint and usually remove a trustee. Appointors are often practical in family trusts. The trustee is responsible for managing the funds of the trust. If the instrument is discretionary on how the funds can be used, then the trustee decides how funds should be distributed amongst the eligible beneficiaries. If the trust has fixed beneficiaries then the trustee must follow the terms of the trust with any distribution.

Trusts can also be established through a court order.

There are various types of trusts. Some of the most common trusts include:

Discretionary (Family) Trust: The trustee has discretion as to the distribution of income and assets to the beneficiaries. This is often used for asset protection, family wealth holdings and income streaming within the tax rules.
Fixed or Unit Trust: The beneficiaries hold a defined or fixed entitlement or distribution. This is often used in joint ventures and investments, where flexibility is not desired.
Hybrid Trust: This is a combination of fixed interests, usually in the form of capital and discretionary income distribution. This is used when there are mixed investors or family outcomes.
Testamentary Trust:This trust is established by a Will and does not commence until the death of the testator. The trustee often has discretionary powers. Testamentary trusts can provide intergenerational planning, asset protection for minors or vulnerable beneficiaries or for tax reasons.
Bare Trust: The trust holds property with no active duties beyond following the beneficiary’s directions.
Special Disability Trust: Provides for a person with a qualified disability. The trust is subject to a strict eligibility criterion, as well as spending and reporting requirements. It can be used to help the beneficiaries to receive concessions if they are on a Disability Support Pension.
Charitable and Superannuation trusts: These are purpose-based trusts that are subject to specific legislative requirements.
Court-ordered or Statutory Trusts: Trusts that are usually used to hold compensation awards.

In New South Wales, private trusts generally have a maximum duration of 80 years, unless the deed specifies an earlier date or event that ends the trust. This is known as vesting the trust, which means beneficiaries become absolutely entitled and the trustee must distribute the trust in accordance with the trust deed. Deeds may grant the power to extend or vary the vesting terms.

There are many reasons why trusts are established. They include:

To separate the control (the trustee) of the asset from the owner (the beneficiary) of the asset. This is particularly useful if a beneficiary is a minor or has a disability.
They give flexibility in tax planning.
Protect assets from financial claims made against a beneficiary.
To use as a business entity for investments.

It is advisable that you speak to someone who specialises in trust law if you are wanting to set-up or re-evaluate an existing trust. They can:

Help determine what type of trust is suitable for your needs and help you achieve your goals and objectives.
Explain to you how a trust works.
Ensure your trust is governed properly by helping you find an appropriate trustee and appointor.
Explain the implications of a trust for asset protection, estate planning and family law reasons.
Draft a trust deed that adheres to tax and trust laws.

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.