A trust is a relationship where a trustee (an individual or a company) carries on business for the benefit of other people (the beneficiaries). A trust may be discretionary, which is where the trustee decides how profit will be distributed among beneficiaries. Alternatively, it may have fixed interests, meaning it will benefit certain people in predetermined proportions. Therefore, to determine whether you should appoint a corporate trustee for a family trust, it is important to understand how a trust operates. This article will explore how a family trust works and the reasons for choosing a corporate trustee.
What is a Family Trust?
A discretionary trust (often referred to as a family trust when the beneficiaries are linked via family relationships) is one of the most common types of trusts in Australia. This type of trust holds properties on behalf of beneficiaries who have discretionary powers as to the distribution of income.
Who Can Be a Party To a Trust?
|Settlor||This is the person who owns the assets and property.|
|Trustee||This is the person who grows the assets and cares for the trust.|
|Beneficiaries||Beneficiaries serve two functions:
|Appointor||The appointor is an optional party to a trust. They can change the trustee if they choose. Additionally, their consent is required prior to any changes being made to the trust.|
What Are the Reasons for Setting Up a Trust?
There are many reasons for setting up a trust.
|Reason||Further Information (if relevant)|
|Creditor asset protection for “risk” beneficiaries||For example, trading company directors and professionals|
|Flexibility||Each year, the trustee can decide which beneficiaries are to benefit (the trustee’s choice will be more limited if they enter into a family trust)|
|Accumulation of trust income||While taxed at 46.5% in the trust, the rate is only 30% for as long as the trust income is “parked” with a corporate beneficiary,|
|Discounted flow of capital gains tax to beneficiaries|
|Protection of assets from the primary beneficiaries’ hostile family members|
|Charitable or religious giving|
|Tax on income from the trust is paid by the beneficiaries at marginal rates|
|Control of a family trust is shared between the trustee and appointor|
Why Have a Corporate Trustee For a Family Trust?
It is a common practice to have corporate trustees for family trusts for tax benefits. This ensures the limitation of the trustees’ liability to the corporate asset.
Generally, corporate trustees are shell corporations with no, or minimal, assets. The trustee is personally liable for the trust’s liabilities. Therefore, it is common for trusts to have corporate trustees to limit the trustees’ liabilities to the assets of the corporation.
Because of this, often, this business structure is more tax effective.
Advantages of a Corporate Trustee
Advantages of having a corporate trustee include:
- they can exist indefinitely, unlike an individual trustee who will eventually die;
- you do not have to change the legal ownership of the trust’s assets when the directors or shareholders of the corporate trustee change. In contrast, you have to change the legal ownership of the trust’s assets when an individual trustee changes;
- the shareholders of the corporate trustee can effectively control the trust by appointing the directors of the corporate trustee;
- asset protection; and
- limited liability.
Having a corporate trustee for the family trust can be very beneficial. If you want a family trust to exist and flourish indefinitely, even after you pass away, a corporate trustee may be the right option for you. However, it is always necessary to seek legal advice before making such a decision. Accordingly, if you need assistance setting up a family trust or appointing a corporate trustee, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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