What Is A Trust & How Does It Work?
A trust is an obligation imposed on a person or organisation (trustee) to hold property or assets (such as business assets) for the benefit of others, a trust is not a separate legal entity.
Trusts account for 23% of all Australian businesses. Trusts also have the highest survival rate compared to all other entity types. We'll explore what a family (discretionary) trust is, the benefits and how to set one up.
What is a Family Trust?
The most common type of trust in Australia is a family (discretionary) trust. Families will usually set up a trust so they can protect their assets and pass them on to their children when they are old enough. Under a trust arrangement, a person or company agrees to hold assets for the benefit of others. The person or company holding the assets can choose the amount of money or assets that get passed on.
Representatives of the trust
The structure of a trust is very different compared to other Australian entities. There are 4 major roles that need to be considered when establishing a discretionary trust:
The Trustee: is responsible for managing the trust and its assets. They carry out transactions and distribute assets to the beneficiaries. The trustee can be one or more individuals or a company.
The Beneficiary: is an individual, corporation or charitable organisation that receives income or assets from the trust at the discretion of the trustee.
The Settlor: Their role is to create the trust by providing an initial settlement sum (usually $10) to the trustee. This is typically a close family friend, accountant or lawyer who has no further involvement in the trust.
The Appointor: is named in the Trust Deed and has the power to remove and appoint trustees. This usually happens if the trustee dies or becomes bankrupt.
Find out about setting up a PTY LTD Company as your trustee here
What are the benefits?
Asset protection: all assets that are held in a family trust are protected from creditors. This makes it really popular for parents as they can maintain their assets until the beneficiaries (usually children) are old enough to have legal possession.
Tax advantages: any income generated by the trust from business activities and investments can be distributed to the beneficiaries in lower tax brackets.
Estate Planning: it helps avoids issues such as challenges to the will following the death of a senior family member.
Keep it in the family: it provides an ideal way to pass family assets from one generation to the next.
If you're thinking of setting up a trust and would like to learn more, you can visit our website here. Learn about the trust process in more detail and even generate your very own trust deed!