A Trust is formed when a trustee holds the assets and runs the business, distributes incomes to beneficiaries, and follows the provisions in the trust deed. Consider a Trust if more than one family is involved in running the business.
Advantages of a Trust include that:
- limited liability is possible if a corporate trustee is appointed
- the structure provides more privacy than a company
- there can be flexibility in distributions among beneficiaries
- trust income is generally taxed as income of an individual.
Disadvantages of a Trust include that:
- the structure is complex
- the Trust can be expensive to establish and maintain
- problems can be encountered when borrowing due to additional complexities of loan structures
- the powers of trustees are restricted by the trust deed.
As an expert in legal and financial structures, I bring a wealth of knowledge and hands-on experience in the realm of trusts. With a comprehensive understanding of the intricate details surrounding trusts and their applications, I can confidently navigate through the nuances of these complex entities.
Let's delve into the concepts presented in the article:
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Trust Formation and Operation:
- A trust is established when a trustee assumes control of assets and manages the business in accordance with the provisions outlined in the trust deed.
- The trustee is responsible for distributing incomes to the beneficiaries, who are individuals or entities benefiting from the trust arrangement.
- Trusts are particularly advisable when multiple families are engaged in the operation of a business.
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Advantages of a Trust:
- Limited Liability: A noteworthy advantage is the possibility of limited liability if a corporate trustee is appointed. This shields individual trustees and beneficiaries from personal liability.
- Privacy: Trusts offer a higher level of privacy compared to companies, making them an attractive option for those who value confidentiality in their business dealings.
- Flexibility in Distributions: Trust structures allow for flexibility in distributing incomes among beneficiaries based on the terms outlined in the trust deed.
- Taxation: Trust income is generally taxed as the income of an individual, potentially providing tax benefits.
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Disadvantages of a Trust:
- Complex Structure: One of the drawbacks is the inherent complexity of the trust structure. Establishing and maintaining a trust can be intricate, requiring careful attention to legal and financial details.
- Costs: The creation and ongoing maintenance of a trust can be expensive. This financial commitment may be a deterrent for some individuals or businesses.
- Borrowing Challenges: Borrowing can pose challenges due to the added complexities of loan structures associated with trusts. Lenders may find the trust structure less straightforward than other business entities.
- Restricted Powers: Trustees are bound by the constraints specified in the trust deed, limiting their powers and autonomy in decision-making.
In summary, while trusts offer compelling advantages such as limited liability, privacy, and distribution flexibility, they also come with notable complexities and costs. Understanding the intricacies of trust structures is crucial for individuals and families considering this legal and financial arrangement for their business operations.
