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:

  • capital;
  • 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.

This means that the amount of money beneficiaries receive under a discretionary trust is not fixed. The trustee chooses the amount from year to year.

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

The Settlor

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.

The Trustee

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.

The role of a trustee is something like the role of a company director, who must act in the best interests of the company and its shareholders.

The Appointor

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.

The Beneficiaries

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.

Trust Deed

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.

Asset Protection

A discretionary trust allows a person to hold onto their assets without being the legal owner of the property. This can have significant advantages.

For example, if a creditor was to pursue the assets of a beneficiary, trust property is generally protected because the trustee is the legal owner.

Tax Management

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.

Beneficiary Income

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.

Expense

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.

Retaining Profits

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.

Key Takeaways

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.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Thomas Nickoll

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