So you know what a trust is but are confused about the parties involved? Below is a summary of the key parties to a trust and their roles.
Who is a Settlor?
A settlor is an unrelated party to the beneficiaries of the trust. This may include a close family friend or an accountant/lawyer. For tax reasons, the settlor should not be a unitholder of the trust or a beneficiary. In general, a settlor has no further involvement in the trust after the initial settlement/gift.
Who is a Trustee?
A trustee can either be an individual or corporate entity and is responsible for ensuring that the trust is administered in accordance with the trust deed. In Australia, a trustee is legally required to comply with the terms of the trust deed and the relevant legislation in the State or Territory where the trust is established.
We generally recommend that a company acts as a trustee of a discretionary trust. This is because it assists in minimising the risk of personal liability which is usually greater for an individual trustee then it is for directors of a corporate trustee.
Who 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, it is often viewed as having the ultimate control by, for example, appointing and removing trustees.
Who are the Primary Beneficiaries?
Discretionary family trust deeds largely have two named beneficiaries, often husband and wife, with all other beneficiaries defined by their relationship to the two primary beneficiaries. For example, children and grandchildren as well as any parent, grandparent or more distant ancestors.
Who are the General Beneficiaries?
Under the trust deed, general beneficiaries are those within the class of persons related to the primary beneficiaries (see above).
Who are the Income Beneficiaries?
Some trust deeds separate beneficial entitlement between income and capital (see below). For example, some beneficiaries may be entitled to the income of a trust and have no entitlement to trust capital or vice versa.
Who are the Capital Beneficiaries?
Capital beneficiaries are entitled to trust capital, but not to trust income.
Who are the Default Beneficiaries?
Default beneficiaries are those who enjoy the benefit of either the income or capital of the trust 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. For tax purposes, default beneficiaries are often used in trust deeds to avoid the trustee being assessed on any undistributed trust income at the highest marginal tax rate.
If you have any questions about what is the most appropriate structure for your trust, ask our business structuring experts.