When starting a business, there are so many different structures to consider. It is then critical to choose a structure that best suits not only your business’ immediate needs but also your future growth plans. We’ve put together a guide so you can decide which business structure best suits your needs, and turn our attention to the advantages and disadvantages of trusts.
What is a Trust?
The original purpose of a trust is to provide a flexible method to deal with and preserve real property. Although trusts are now attractive because of their flexible nature, they can be quite complicated. The benefits of establishing a trust include:
- Minimising your tax;
- Protecting your assets; and
- Reducing your asset levels of income thresholds.
However, trusts may not be a suitable business structure to some because of their inherent complexity and cost to set up and run.
Trusts are governed by the following:
- Equitable principles that impose fiduciary obligations on the trustee (in NSW, the Trustee Act 1925); and
- Other legislation depending on why the trust was established, or how it is funded (for example, superannuation trusts are regulated by the law of equity, the Trustee Act, taxation laws and superannuation laws).
What are the Advantages?
An unlimited number of investors can contribute to the trust and as such, trusts can accumulate large amounts of money. Trusts can also obtain loans, however, a lender will want a trust instrument to ensure it has access to the trust’s funds.
If the public chooses to contribute to the trust, it will be regulated under the Corporations Act 2001 (Cth) as a managed investment scheme.
Depending on the type of trust, there is no obligation to disclose financial information to the public.
What are the Disadvantages?
Ease of Establishment
Trusts involve splitting the legal and equitable rights inherent in owning property and giving it to two (or more) people. That is, a trust is a device that allows one person to hold the property for the benefit of another person.
There are several elements required when creating a trust, such as;
- A settlor;
- The trust property;
- The trustee; and
- The beneficiary.
Also, when establishing a trust, you will need to satisfy the “three certainties rule”:
- Certainty of intention;
- Certainty of subject matter; and
- Certainty of objects.
The trust deed should contain all three.
Who manages and controls the trust?
The trustee manages the trust, and the trust instrument defines their role. As a general rule, beneficiaries cannot interfere with the management of the trust unless there is a breach of the trust agreement.
Who is liable in a trust?
A trust is not a separate legal entity. The trustee is the legal owner of the trust property and carries the liabilities that accrue from the use of the trust assets. Further trustees are accountable to the beneficiaries and can be liable for any breach of duty or act of negligence.
How is a trust terminated?
Trusts may be terminated in one of the following ways:
- Beneficiaries’ consent;
- Court order; and
- Distribution of trust property.
A non-charitable trust must not last longer than 80 years, although some states will allow for longer periods of time.
How is a trust taxed?
Trust income is assessed either in the hands of the trustee or
(if fully distributed), in the hands of the beneficiary. Never both.
Trusts are useful for tax planning as they allow for income splitting and estate planning, however, they are regulated to minimise tax evasion, and it may be costly to keep up with the compliance costs.
Choosing a business structure is an important factor in ensuring the success of your business. It is then necessary to have a thorough understanding of the various business structures to determine which best suits your needs. If you have any questions about trusts or any other business structures, get in touch with our business structuring experts on 1300 544 755.