Frequently Asked Questions About Trusts | LegalVision (2024)

Discretionary trusts are a versatile structure that many people can use to their advantage for a broad range of business activities. You can use trusts that have a trading function, hold shares in an operating company, or hold personal assets. In any case, trusts are useful as they can provide benefits such as protecting assets, distributing income, and minimising tax obligations. However, it is crucial that you set up a trust properly. This article will answer the top frequently asked questions about trusts.

What are Discretionary Trusts?

A trust is a relationship between a person or company (known as the ‘trustee’) that holds legal title to property for the benefit of others (known as the ‘beneficiaries’). The trustee exercises control over the trust on behalf of the trust’s beneficiaries. With a discretionary trust, the trustee can exercise discretion as to which beneficiaries receive a distribution of income from the trust property. Additionally, beneficiaries can receive distributions of income or capital from the trust.

Who are the Key Players in a Trust?

Trustee

A trustee is a person that you appoint to legally own all of your property. This person could be yourself or the company you act as a director for. You may want to retain the responsibility at arms length and instead appoint someone you trust, for example, your spouse, close friend, family member, or a professional.

Importantly, acting as a trustee is a significant undertaking and can expose you to sizeable risks. Essentially, trustees must always act in the trust’s best interests. This means that they are unable to conduct any activity which may further their interests ahead of the interests of the trust. For example, a trustee cannot sell their property to a trust as it would be a breach of their duties as a trustee. Another clear breach would be where the trustee uses the trust to purchase property for above market value. Even if the trustee buys the property at a fair market value, they may still have breached their duty if they prioritised their investment over an available and more suitable option.

This role attracts a significant amount of control of the trust property. Therefore, ensure that the trustee will represent the best interests of the trust property.

Appointer

If the trustee dies, annoys you, or is no longer able to act as trustee, the appointer is the person that provides a replacement. Additionally, the appointer will also be responsible for determining whether the trustee gets paid for their assistance in running the trust.

Settlor

A settlor is a person that puts the first property into the trust. The act of putting the first property into the trust is known as a settlement or gift, usually for a nominal sum of $10. The settlor needs to be unrelated to the trust and not receive any benefit from it. Typically, you could use a lawyer, accountant or friend.

Is the Trustee Subject to Any Rules or Regulations?

Broadly, the trustee is subject to rules within the trust deed. The trust deed sets out the scope of a trustee’s powers. If you have specific requirements, consider drafting a deed to limit, constrain or manage their powers. Trustees are also subject to a variety of other legal requirements.

Notably, a trustee has a fiduciary relationship with the beneficiaries. This relationship exists because of the trust placed in the trustee. To protect those in a vulnerable position (those putting trust in the trustee), the law recognises this special relationship and places duties on the trustee to ensure they act in good faith and in the trust’s best interests.

Trust With a Corporate Trustee vs Without a Corporate Trustee

A trust without a corporate trustee will have a person that legally owns the property on trust for the beneficiaries. A corporate trustee is a company that is established to hold legal title to the property in trust for the beneficiaries.

What are the Benefits of the Trustee Exercising Discretion to Distribute Income?

Beneficiaries have no claim to any portion of the trust income. They only receive a benefit when the trustee exercises their discretion and distributes the income. The effect is that a person’s status as a beneficiary does not result in a tangible gain or proprietary interest in the trust property. As there is no claim to the property, you are not subject to tax implications if you do not receive a distribution.

Disadvantages can include that the trustee can stop distributions to a particular beneficiary at any time. Likewise, a beneficiary can do little to change this arrangement. This can present a problem should a dispute arise with the trustee, for example, a family fallout. This is a key reason why you should exercise great care when selecting a trustee.

Family Trust vs Discretionary Trust: Do All Beneficiaries Have to Be From the Same Family?

Another frequently asked question about trust concerns whether the beneficiaries of a trust all have to be from the same family. A family trust and a discretionary trust are essentially the same. The trustee maintains the discretion to distribute income as they see fit. It is more likely, however, that the beneficiaries are all members of the same family. A family trust is simply a commonly used term rather than a requirement that the beneficiaries all be from the same family. Therefore, there is no restriction on you listing people outside your family as a beneficiary.

However, if you do list people outside your family, you may not be able to make a family trust election for tax purposes. This means you will lose access to certain concessions and benefits you would otherwise get if you make the family trust election. Further, if you make distributions to people outside your family, the trustee might need to pay tax on these distributions at the highest marginal tax rate. This is if you have made a family trust election to the Australian Taxation Office for that trust.

Who Owns the Trust Property?

Unlike a person or a company, a trust is not a legal entity that can own property. This is because a ‘trust’ is just a relationship between the legal owner (the trustee) and the beneficial owners (the beneficiaries). As such, documents, including a house title, share certificate, or members’ register, will list the trustee as the property owner.

For example, John Smith is the trustee of a trust and purchases a house. The owner would be listed as “John Smith as trustee for the XYZ Family Trust”. If the trust had a corporate trustee, then the owner would be listed as “ABC Pty Ltd as trustee for the XYZ Family Trust”.

Can Beneficiaries Claim Distributions?

Beneficiaries do not have a claim to any trust distributions. Rather, there is a ‘mere expectancy’ that the trustee may distribute income if they choose. Hence, the term ‘discretionary’ trust.

A beneficiary can request that the trustee act in a particular way through a document known as a memorandum of wishes. This document can outline an arrangement that the beneficiaries may like to have in place. However, as the name suggests, it is merely a ‘wish’ than an order that the trustee acts a certain way. This is another important reason why you should only appoint a trustee that you trust.

Can a Trustee Also Be a Beneficiary of a Trust?

Yes, a trustee can be one of the beneficiaries of a trust. For example, an individual could set up a trust, appoint themselves as trustee and distribute income to their family. However, a trustee cannot be the sole beneficiary of a trust. This is because they would legally own property for the benefit of themselves, which is problematic from a legal perspective.

Should I Incorporate a New Company to Act as Corporate Trustee?

Generally, yes. As the trustee is the legal owner of the trust property, you should consider setting up a new company. Hence, there is no risk of the company having any previous liabilities that may affect the trust property. For example, liability may arise if you use a company that:

• is currently trading, or has previously traded, and incurred a debt with the ATO;
• is subject to an unfair dismissal claim; or
• has a pending court case.

As the company is the legal owner of the trust property, there is a risk that creditors who are owed money could claim the trust property.

What are the Types of Beneficiaries?

Companies and individuals can be beneficiaries of a trust, and they’ll fall into one of the following categories:

Can People Under 18 Be a Beneficiary?

Yes, but you should be aware that if a trustee distributes income to someone under 18, they will be subject to a substantial amount of tax.

Can I Transfer Property I Already Own Into a New Trust?

If you set up a new trust, you can transfer property that you already own into it. You should know that the transfer of property into a trust will generally be classed as a sale. This can be an expensive exercise as, in addition to the appropriate sales contracts/agreements, this can incur Capital Gains Tax and stamp duty. Ensure that you speak with an accountant if you’re looking to establish a trust and transfer existing property.

Can a Trust Trade as a Business?

It sure can. Approximately 5% of all businesses in Australia operate through a trust structure. If you are going to run a business through a trust, you will require an Australian Business Number. As with all trust property, the trustee will own the business’ assets.

Do I Need to Pay Stamp Duty When I Set Up a Trust?

The answer depends on what state or territory you established your trust in and where you intend to own property or run a business. For example, in New South Wales, you will likely incur a stamp duty of $500 for setting up the trust.

Key Takeaways

Trusts are a commonly used business structure. However, they are fairly complicated to set up. There are different players in a trust, including the trustee, appointer, settlor and beneficiaries. There are also different kinds of beneficiaries and rules surrounding trust distributions.

For more information on discretionary trusts or any other business structure, contour experienced trust lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit ourmembership page.

Frequently Asked Questions