Running your business through a trust offers many advantages. Trusts are a good way to manage your tax and protect your assets. A trust is a legal structure that allows one or more people (or companies) to manage property for somebody else’s benefit. Depending on what the trust is for, this person might receive:
- income; or
- a combination of the two.
There are different types of trusts. These include:
- discretionary trusts; and
- family trusts.
This article will explain the difference between discretionary and family trusts.
What Are Discretionary Trusts?
Discretionary trusts are set up to allow the person or people managing the trust to choose:
- who can benefit from the trust; and
- how much money beneficiaries will receive.
What Are Family Trusts?
Family trusts as generally understood are discretionary trusts that hold a family’s assets or run a family business. Usually, one or more family members will manage the trust assets for the benefit of their family as a whole.
The Key Players Involved in a Trust
This person sets up the trust. Usually, the settlor will be a lawyer or accountant. Once the settlor does their part in creating the trust, they generally have no further involvement. The settlor cannot benefit from the trust.
This person is the legal owner of the trust property. The trustee decides how to manage the trust assets. However, even though the trustee makes all decisions, choices and transactions relating to managing the property, they do so in the interests of those benefiting from the trust. The trustee must act in the best interests of these people.
This person has the power to remove and nominate trustees. Usually, this will happen when a trustee passes away or otherwise cannot continue to manage the trust.
These people benefit from the money or property in the trust. The beneficiaries do not have ownership over the trust assets, but they have the right to be considered when the trustee makes decisions about distributing money or property from the trust.
This is the legal document that formally creates the trust and outlines how it will work. It will usually set out:
- the objectives of the trust fund;
- who the beneficiaries are;
- who the trustee is; and
- how payment will be distributed from the trust.
The Advantages of Discretionary Trusts
People may choose to set up a trust for many different reasons. However, there are several business advantages of using discretionary trusts.
A discretionary trust allows a person to hold onto their assets without being the legal owner of the property. This can have significant advantages.
A company structure has to pay income tax on its net income every financial year. Discretionary trusts, however, generally do not have to pay income tax. Instead, the beneficiaries pay tax on their share of the trust’s net income. In a family trust, this means that the trustee can distribute assets in a way that reduces the overall tax paid by the family.
Unlike companies, trusts may be eligible for the general 50% capital gains tax (CGT) discount on the disposal of capital assets.
Discretionary trusts are a great way of providing income to beneficiaries who may be dependent or otherwise unable to manage their assets.
The Disadvantages of Discretionary Trusts
Even though a trust can offer many advantages, there are also some disadvantages of using trusts as a business structuring option.
Trusts can be quite costly to set up, administer and restructure.
Liability of Trustees
Trusts offer excellent asset protection for the beneficiaries. However, because trustees are the legal owners of the trust property, they are personally liable for any trust debts incurred. Having a company trustee, rather than an individual, can reduce this liability.
Growth and Investment
Investors tend to favour putting their money into company structures rather than trusts. Because of this, it can be harder to grow a business that runs through a trust.
Unlike a company, trusts are not designed to keep any profits. If trust beneficiaries do not receive all profits, the trust assets will be heavily taxed.
What Are Unit Trusts and How Are They Different?
If you are thinking about setting up a discretionary trust, you might have come across the idea of a unit trust. Unlike a discretionary trust, where the person managing the assets chooses how to distribute profits, a unit trust shares profit amongst the beneficiaries based on how many ‘units’ they have in the trust. As the name suggests, a discretionary trust gives the trustee a lot of choice about how they distribute profits. A unit trust has a much more fixed process.
No two discretionary or family trusts are the same. After all, every business and every family is different. Trusts offer significant asset protection and tax management options, and these benefits make them an attractive business structure. That said, it is critical to understand precisely how a trust will fit your business and what other business structuring options you have.
If you need legal advice on business structuring or assistance in setting up your trust, contact LegalVision’s business structuring lawyers on 1300 544 755 or fill out a form on this page.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.