Trusts are set up for a number of reasons including succession planning, asset protection and tax planning. Trusts can also arise from conduct of the parties involved or by operation of law. The basic element of a trust is someone (the trustee) holding assets on trust for the benefit of another (the beneficiary).
There are many different forms of trusts and your choice of trust will depend upon your circumstances and goals for the trust. The type of trust is usually determined by the rights of the beneficiaries and the powers of the trustee to deal with the assets until they are transferred to the beneficiaries. In short trusts can be categorised as follows:
This is a trust that relies on the discretion of the Trustee to deal with the Trust Property and how to distribute any income or capital from that property to Beneficiaries. Often a discretionary trust is used to benefit family members.
Sometimes a discretionary trust is called a family trust. The advantages of family trusts are asset protection and income splitting between family members usually for tax planning purposes.
Most people with a self-managed superannuation fund may use moneys held by the fund for investment purposes rather than investing in their own personal names. It is essential this type of trust comply strictly with the relevant laws in order to obtain the substantial income tax benefits that are available to the members of the fund. The laws which must be complied with are very complex and frequently change. Therefore, it is essential to obtain careful, specialist advice when establishing a superannuation trust.
The Beneficiary is a unit holder in such trust and the entitlement to the trust property/trust asset depends on the number of units held by the Beneficiary. The units in the trust can be bought and sold like shares in a Company. This trust has a more rigid structure than the discretionary trust as the Trustee has no discretion. The units in a unit trust may be owned by other discretionary trusts, companies or by individuals.
A trust carrying on a business is an alternative to a company or an individual. Usually a unit trust is used as the trading entity but sometimes a discretionary trust can be used as well.
A trust created using a mixture of the rigidity of a unit trust while providing the Trustee with some discretion at the same time.
Special Disability Trusts (SDT’s) allow immediate family members and carers to provide for the future care and accommodation needs of a ‘severely disabled person’. The benefits of a SDT include:
- families being able to set up a fund to provide for a severely disabled person after the death of the primary carer or parent; and
- income from assets in the SDT is not taken into account for the purpose of the income test and therefore not reduce the beneficiary‘s social security benefits.
A trust set up for strictly charitable purposes are usually set up for the benefit of the public at large and can include purposes such as the relief of poverty, education, scientific and health research, religion, care of animals or the environment.
A trust created pursuant to a Will.
A special trust set up so income goes to a Beneficiary and is available for the Beneficiary and the family of the Beneficiary for their maintenance and support.
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