Why do we setup a trust?
- To separate the owner of the asset (the beneficiary) and control over that asset (the trustee).
- Greater flexibility in tax planning.
- To protect assets from financial claims made against the beneficiaries.
- Use as a business entity either for business trading or investing
What does a trust need?
The settlor: The settlor is only involved with a trust when it is first established. The responsibility is only to set up the trust and name the beneficiaries, the trustee and, if there is one, the appointor. For tax reason, the settlor should not be a beneficiary under the trust. Typically, you use a lawyer, an accountant or a friend to be the settlor and the payment is usually a gift of a small sum of $10.
The trustee: The trustee (or trustees) administers the trust. The trustee owes a duty directly to the beneficiaries and must always act in their best interests. All transactions for the trust are carried out by and in the name of the trustee.
The beneficiary or beneficiaries: The beneficiaries are the people or companies for whose benefit the trust is created and administered. Beneficiaries can be either primary beneficiaries (who are named in the trust deed) or general beneficiaries (who often are not named individually). General beneficiaries are usually existing or future children, grandchildren and relatives of the primary beneficiaries.
The trust deed: The trust deed (or, in the case of a testamentary trust, the will) is the formal document which sets out how the trust will run and what the trustee is allowed to do. It is very important that the trust deed or will is drafted by a solicitor.
The appointor: The appointor is very important as they have the power to appoint and remove the trustee. The position is non-essential but generally it is included to give extra protection and control over the trust/trustee.
Types of Trustee
An individual trustee is where a natural person is appointed the trustee of the trust.
Drawbacks of an individual trustee
- The individual is responsible for the trust and may therefore be liable for all shortfalls. If this amount is substantial the personal assets of the individual trustee may be at risk.
- Issues with asset identification between the individual and the trust also arise. This is particularly important if a situation occurs where the individual in their own capacity are sued, bankrupted or suffer a marital breakdown, trust assets may be incorrectly seized or distributed in satisfaction of a personal claim.
- Another issue relates to the succession of the individual trustee. If an individual trustee passes away, a new trustee will need to be appointed, which may cause unintended tax or duty implications.
A corporate trustee is a company that is appointed the trustee of the trust. The company usually has minimal or no assets and would ordinarily be incorporated for the sole purpose of acting as trustee of a trust.
Benefits of a corporate trustee
- It limits the liability of the trustee to the assets company.
- Directors’ of the company would not be liable for any debts incurred from the trust.
- Another advantage of a corporate trustee is the succession benefits. The shareholder of the corporate trustee is able to leave the shares in the trustee (and thus control of the trustee) to their desired successor, which is a much clearer method of passing on control than the change of individual trustees.
Disadvantages of a corporate trustee
- The major drawback to utilising a corporate trustee is the cost of establishing the company and the ongoing annual ASIC fees incurred.
- Complex to establish and administer.
- Difficult to dissolve, dismantle, or make changes once established particularly where children are involved.
- Any profits retained to reinvest into the business will incur penalty tax rates.
- Can’t distribute losses, only profits.
What is the tax requirements?
- A trust must have its Tax File Number (TFN).
- It must also lodge its own annual trust return.
- A trust does not require to pay any tax.
- As mentioned above, the income distribution flows to the beneficiaries and the beneficiaries will be liable to pay tax on the income distribution from the trust.