In Short
- A trust allows property to be managed for someone else’s benefit by separating legal and equitable rights.
- Key roles include the settlor, trustee, appointer, and beneficiaries, each with specific duties and responsibilities.
- Trusts are useful for asset protection and tax management, with flexibility in distributing assets among beneficiaries.
Tips for Businesses
When setting up a trust, clearly define the roles of the settlor, trustee, appointer, and beneficiaries to avoid disputes. Consider using a corporate trustee to minimise personal liability and ensure compliance with trust terms. Consult a business lawyer to ensure the structure aligns with your goals and complies with legal requirements.
A trust is a flexible, legal structure that allows one or more people (or companies) to manage property for somebody else’s benefit. It involves splitting the legal and equitable rights inherent in owning property and giving it to other people. Ultimately, trusts are a great way to manage your taxes and protect your assets. To help you understand the parties involved in a trust, this article provides a summary of each role.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Who is a Settlor?
A settlor is an unrelated party to the beneficiaries of the trust. This may include a close friend, family member or a professional advisor like an accountant/lawyer. For tax reasons, the settlor should not be a unitholder of the trust or a beneficiary. The settlor’s role is to place the property into the trust, which is known as a settlement or gift. Usually, the settlement is for a nominal or small sum, such as $10. In general, a settlor has no further involvement in the trust after the initial settlement or gift.
The role of the settlor is often overlooked, but it is important to note that without a valid settlement, a trust may not be properly constituted.
Who is a Trustee?
A trustee is the legal owner (but not the beneficial owner) of the trust’s assets and has an array of strict duties in distributing and managing those assets. They can either be an individual or corporate entity and are responsible for administering the trust in accordance with the trust deed or trust agreement. In Australia, a trustee must legally comply with the terms of the trust deed. Likewise, they must comply with any relevant legislation in the State or Territory where the trust is established.
You may consider a company to act as a trustee of a discretionary trust, which is known as a corporate trustee. This is because it assists in minimising the risk of personal liability which is usually greater for an individual trustee than it is for directors of a corporate trustee. It is also easier to effect changes of control and in situations of succession.
Trustees have fiduciary duties, which means they must act with honesty, integrity, and in the best interests of the beneficiaries. Breaching these duties may lead to serious legal consequences. Trustees are also responsible for accurate record-keeping and filing trust tax returns annually. If the trustee fails in these duties, beneficiaries may seek legal recourse.
Notably, trustees are liable to significant risks and must act in the trust’s best interests at all times. If you decide to use an individual trustee, it is common to use a family member, close friend or a professional.
Continue reading this article below the formWho is an Appointer?
An appointer can appoint and remove trustees under the trust deed. An appointer can also determine the trustee’s remuneration. While an appointer does not have the day-to-day control of the trust, they generally have the ultimate control by, for example, appointing and removing trustees, or providing a new one in the event of the trustee’s death.
If a trust deed does not clearly specify the identity of the appointer or the mechanism for replacing one, significant disputes can arise.
Who Are the Beneficiaries?
Primary Beneficiaries
Primary beneficiaries are the individuals that the trust deed explicitly identifies and lists. Discretionary family trust deeds largely have two named beneficiaries, often de facto partners, or husband and wife. All other beneficiaries (general beneficiaries) are defined by their relationship to the primary beneficiaries.
These individuals are often the initial focus of distributions and typically have more direct influence on how the trust is managed, though decisions are ultimately made by the trustee.
General Beneficiaries
Under the trust deed, general beneficiaries are those within the class of persons related to the primary beneficiaries. For example, general beneficiaries can be children and grandchildren as well as any parent, grandparent or more distant ancestors.
Trusts often define these classes broadly to provide flexibility in distributions. This means that trustees can distribute income or capital to a wide range of family members depending on the needs or circumstances in any given financial year.
Income Beneficiaries
Some trust deeds separate beneficial entitlement between income and capital. For example, some beneficiaries may have entitlements to the income of a trust and no entitlement to trust capital or vice versa. Likewise, the trust’s income will typically stem from interest earned on trust money in a term deposit or rent earned from a trust-owned property.
Capital Beneficiaries
Capital beneficiaries have entitlements to trust capital, but not to trust income. This means they may benefit from the eventual distribution of assets held in the trust but not from regular income earned during the operation of the trust.
Capital distributions are typically considered upon the winding up of the trust or sale of major assets and are often used in estate planning to ensure wealth is transferred efficiently to future generations.
Default Beneficiaries
Default beneficiaries are those who enjoy the benefit of either the income or capital of the trust. This is only to the extent that the trustee has not exercised its discretion to distribute the trust’s income or capital favouring any other beneficiary or beneficiaries in the relevant income year.
Additionally, for tax purposes, using default beneficiaries in trust deeds help the trustee in avoiding being assessed on any undistributed trust income at the highest marginal tax rate.
Key Takeaways
A trust can be a great way to manage your tax and protect your assets. However, there are key parties to a trust, including the:
- settlor;
- trustee;
- appointer; and
- beneficiaries.
To help you navigate the most appropriate structure for your trust, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A settlor is an independent party who places property into a trust for the benefit of the beneficiaries. Typically, the settlor is not a beneficiary and their role is limited to initiating the trust with a nominal gift. Without a proper settlement, a trust may not be legally valid.
A trustee legally owns the trust assets and manages them in accordance with the trust deed. Trustees have strict duties to act in the beneficiaries’ best interests, including managing distributions, keeping records, and complying with legal obligations. Breaches can lead to legal consequences and beneficiary claims.
We appreciate your feedback – your submission has been successfully received.
