Four Types Of Trust In Australia
Published 10:19 pm 26 Nov 2020
Once used predominantly by the very wealthy, trusts are now being put to use by large numbers of regular Australian families. The reasons are simple. As well as delivering potential tax advantages, these clever legal arrangements can help protect family assets for many years to come. DGI Founder and CEO Dominique Grubisa explains more.
So, what is a trust and how could one work for you?
Types of trusts?
In essence, a trust is a legal vehicle through which a third party or ‘trustee’ holds and directs assets on behalf of beneficiaries. The key elements in a trust arrangement are the settlor who creates the trust, the trustee who administers it, the fund where income is received, and the beneficiaries who benefit from the trust. One of the key features of many trusts is that they separate ownership of assets from control, which can have both tax and asset-protection implications.
There is a wide range of different trusts that can be established depending on your individual circumstances, including:
Discretionary trusts are trusts where the trustee is able to exercise discretion in the way he or she distributes the assets held by the trust. The trustee can distribute assets to some beneficiaries and not to others, and carefully time the release of assets to achieve maximum benefit. This can be useful for both tax efficiency and asset protection purposes. For example, discretionary trusts are often used as family trusts. In a case where one family member is in a high tax bracket and another, like a spouse is in a lower bracket, the trustee might help reduce the tax paid by the family by paying all the proceeds from the trust to the spouse. Meanwhile, because a discretionary trust separates asset ownership from control, it’s difficult for creditors to access funds held in trust should one of the beneficiaries go bankrupt or experience other legal problems.
Discretionary trusts can be used to distribute the profits from a family business and, when created in association with a will, become testamentary discretionary trusts for the management of deceased estates.
With a bare trust, the trustee has no discretion and simply holds the assets on behalf of the beneficiary. He or she releases the assets when directed by the beneficiary. This is the simplest form of trust and offers little in the way of asset protection. However, such trusts are useful in a range of circumstances. They are typically used by people wanting to buy property via their self-managed super funds. In instances where the super fund holder needs a loan to acquire the property, the trust is the holder of the property until the loan is repaid. Another use of a bare trust is buying a property where you may not want the vendor to know your identity, such as buying from a neighbour who has vowed never to sell to you.
A charitable trust is a trust established specifically for charitable purposes. Such trusts can be used to maximise the amount of funds beneficiaries receive while reducing the amount of tax they pay.
While many trusts offer a degree of asset protection by separating ownership of assets from control, they are not infallible. The concept of a Vestey trust takes asset protection to the next level. This involves establishing a special external trust to give you an additional layer of protection and can stop other creditors stripping away assets.
So, don’t write off trusts as something only used by the super-wealthy. Whether your goal is asset protection, tax effectiveness or related to self-managed super, there’s a trust to suit you.
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