A trust is an agreement that allows a person (or company) to hold particular assets or property for the benefit of another person. The person who holds the asset or property is called the Trustee and the person who will eventually benefit from the asset or property is called the beneficiary.
There are several types of trusts, and they are set up for many different reasons. A trust is usually set up by way of a Trust Deed involving several parties.
What are the benefits of a trust?
There are many benefits to creating a trust, the most common being:
- Trusts provide asset protection, protecting financial claims that could be made against the beneficiary of the trust;
- Trusts allow property or assets to be held in a tax effective way, such as potentially reducing income tax and capital gains tax;
- Trusts can assist with planning for retirement, and effectively managing your estate.
Who are the parties to a Trust?
The settlor creates the trust including naming the trustee, beneficiaries and appointer (if necessary).
The trustee administers the trust in the name of the beneficiaries. A trustee has an ethical duty to act in the best interests of the beneficiaries in every decision they make on behalf of the trust.
Depending on the nature of the trust there may be one or more beneficiaries, and these persons (or person) directly benefit from the trust. Beneficiaries can be anyone ranging from those with mental impairment, under age or elderly. The mental capacity of the beneficiary is not in question when setting up a trust.
The trust may also have an appointer. If this is the case it will be very important who the appointer is as they will have the control over the trust including appointing and removing trustees.
The Trust is usually created by way of a Trust Deed and this document will indicate the rules associated with being a Trustee or Appointer of the Trust. When questions arise out of the Trust, and how it should be carried out, it is vital to review the Trust Deed first as this will have a lot of answers.
What types of Trusts are there?
There are many types of trusts depending on what you are intending to get out of creating the trust, whether it be for tax reasons, to benefit a person after you die, or benefit a child or loved one.
A fixed or Unit trust restricts the Trustees ability to distribute the assets or capital that is held by the trust. Essentially, the beneficiaries have a particular entitlement under the trust and the Trustee must strictly exercise those entitlements.
A discretionary trust is quite different to a fixed trust as the Trustee has the complete discretion as to how and when they distribute the assets or capital held in the trust. Each year the trustee has the sole discretion to allocate the funds as they see fit, and determine how much each beneficiary will receive, if any. Discretionary trusts are much more common, especially when being created by families, than a fixed or unit trust as it gives the trustee a lot more power to allocate the capital held in the trust. For more information on Discretionary Trusts, click here.
As the name suggests a Hybrid trust is a mix between a fixed/unit trust and a discretionary trust. Under this trust, the trustee must allocate a certain amount of the assets or capital to the beneficiary, but the trustee also possess some discretion and ability to make further distributions as they deem necessary.
This is a form of trust created by your will and is commenced upon your death. This is a way to leave your assets and capital to your family upon your death that is tax effective. This can be put in place, for example, to protect the health, education and advancement of life of your children after you pass away. For more information on Testamentary Trusts, click here.
If you would like to create a trust but are unsure on which one to set up, call Rockliffs Lawyers or make an online enquiry to speak to one of our highly experienced lawyers who can explain the different types of trusts and advise you in selecting the right one for your situation.