The Different Trust Structures in Australia
In Australia, trusts come in all shapes and sizes, complete with their limitations and advantages. These individual differences also make up the finer details you will need to weigh up when deciding on the right trust for your circumstances.
1. Discretionary Trust
Discretionary trusts are also referred to as ‘discretionary family trusts’ and are typically connected to other aspects like tax planning or asset protection between family members. In a discretionary trust, beneficiaries do not have set interests in the trust income or the property associated with it. However, discretionary trusts offer the ability to decide whether they are to receive trust income or capital, and the amount that would equate to at the trustee’s discretion. The trustee can distribute income and capital gains to any family member at their own discretion.
2. Fixed Trust
Generally the same as a fixed unit trust, fixed trusts consist of the income and capital shared across beneficiaries, also known as unit holders, based on the number of units they hold in the fund. A unit refers to a piece of property that makes unit holders eligible for a specific proportion of the capital (i.e., the company and the amount it earns).
For example, a trust could feature 100 units and four beneficiaries, each holding 25 units. These are paid out in the form of dividends. In these cases, the trustee does not need to carry out any discretion when splitting income and distributing income, as every beneficiary is entitled to a fixed share of the trust income and capital.
3. Testamentary Trust
This form of trust usually takes effect upon death, where the deceased leaves instructions regarding how their wealth should be distributed to family members and future generations after they die.
In these cases, the trust is set up under the terms of the will. For example, if you were to pass away while your children were considered minors in Australia, a testamentary trust would allow your chosen trustee to put assets aside and manage the deceased estates. In testamentary trusts, they can do so until your children are old enough to handle their inheritance and financial affairs.
4. Special Disability Trust
Special disability trusts (SDT) act to set up stable and ongoing care and accommodation for a family member with a severe condition or disability. For example, an individual with chronic Alzheimer’s disease or dementia may have a special disability trust set up and use the trust income to pay for aspects related to care (like therapy, certain meals, mobility, aids, accommodation, etc.).
To create an SDT, the family member that is the beneficiary needs to meet the legal definition of what comes under the category of a ‘severe disability’. In these cases, Services Australia will assess the severity and validate whether the beneficiary is eligible for an SDT. Additionally, SDTs carry tax benefits and other financial advantages, compared to different types, like family trusts.
5. Charitable Trust
Charitable trusts are used to raise funds for charities and non-profit organisations. They are generally run through a board of directors who make decisions about how money raised from donations is spent. This means that charitable trusts are able to provide more flexibility than discretionary trusts when deciding how to spend donated monies.
6. Superannuation Proceeds Trust
When someone passes away, their superannuation provider pays out the remaining funds to the allocated beneficiary or dependents. When this occurs after the death itself, it is known as a ‘death benefit’. In cases of a superannuation proceeds trust (SPT), the trust only carries the death benefits of the deceased.
The biggest advantage of setting up this trust structure is that it protects the death benefit from any other third party who may try to get their hands on the capital – i.e. creditors.
Which Trust Is Right For You?
To understand how to pick the right trust for you, some questions are worth keeping in mind. For example, you may choose to ask yourself:
- What is my situation?
- Is my current structure working well? If not, why?
- What changes need to happen?
- How much control over my finances do I want to give others?
- Do I plan to leave anything behind?
- Are there any beneficiaries involved? If yes, which ones?
- Who will administer the trust?
- Will anyone else receive capital distribution?
- Can I afford to lose everything?
Choosing the right fund for yourself can be difficult because there are so many different types of trusts in Australia. The best way to make a decision is to do some research, find out what kind of investment options are available, and consider what details you’ll need to keep in mind regarding beneficiaries, trustees, and third parties. Particularly, you’ll need to understand the assets you own, be it business assets, investment assets or family assets, and whether they stand to be lost in certain circumstances.
To sum up our side-by-side comparison to trusts in Australia, here are the main factors to keep top of mind:
- Trusts are legal structures that protect your capital and property in cases such as your own death. It can be passed down generations of family members or equally dealt out to beneficiaries of a company (as two examples).
- A trustee is an individual that manages the funds of the trust.
- A beneficiary is the individual nominated to receive entitlements from a fund, dealt out by the trustee.
- There are several types of trust funds in Australia: Discretionary trusts, fixed trusts, testamentary trusts, special disability trusts, charitable trusts and superannuation proceeds trusts.
- The right type for you will depend on your circumstances and the circumstances of the beneficiaries you intend on distributing entitlements to.
- You can receive professional and specialist support and tax advice from a provider such as KNS Accountants to help you set up the right trust type and to understand the details involved.
Book a consultation with KNS Accountants now to start your journey towards setting up a trust.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.