In Australia, trusts come in all shapes and sizes, with limitations and advantages. These individual differences also make up the finer details you must weigh when deciding on the right trust for your circumstances. It’s also important to note that a trust is not a legal entity or person but a relationship recognised and enforced by the courts.
Another important type of trust structure in Australia is superannuation funds. These superannuation trusts are essential for managing retirement savings and ensuring members receive retirement benefits while being subject to various federal regulations and standards.
A Quick Note on Using Trusts
A trust deed outlines the terms and conditions governing a trust, impacting the rights and obligations of both trustees and beneficiaries. Trusts should be established with a legal agreement and formal deed known as a declaration of trust or a deed of settlement. If the trustee breaches their obligations under the trust deed, the beneficiaries may have legal recourse in the courts.
The Different Trust Structures and Trust Deed in Australia
1. Discretionary Trust
Discretionary trusts are also called ‘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 associated property.
Discretionary trusts offer tax benefits by allowing income distribution to beneficiaries in lower tax brackets. The trustee, who is legally responsible for managing the trust, can distribute income and capital gains to any family member at their own discretion.
2. Fixed Trust
Generally the same as a fixed or 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.
Fixed trusts are often structured as unit trusts, where beneficiaries hold units that entitle them to a proportionate share of income and capital, similar to shareholders in a company. 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 exercise any discretion when splitting income and distributing income, as every beneficiary is entitled to a fixed share of the trust’s 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 a testamentary trust, a person holds property or assets for the benefit of others, typically family members or future generations.
Testamentary trusts are used to protect assets and manage the distribution of wealth to beneficiaries after a person’s death.
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. They can do so in testamentary trusts until your children are old enough to handle their inheritance and financial affairs.
4. Special Disability Trust
Special disability trusts (SDT) are established to provide 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 establish a special disability trust 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 who is the beneficiary needs to meet the legal definition of a ‘severe disability’. Services Australia will assess the severity of these cases 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 raise funds for charities and non-profit organisations. They are generally run by a board of directors who decide how money raised from donations is spent. This allows charitable trusts to provide more flexibility than discretionary trusts when deciding how to spend donated monies. Charitable trusts serve philanthropic purposes and may qualify for certain tax exemptions and concessions.
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.
All superannuation funds in Australia are managed through superannuation trusts, which provide members retirement benefits and significant tax advantages for retirement savings.
The biggest advantage of setting up this trust structure is that it protects the death benefit from creditors and any other third party who may try to acquire the capital.
7. Unit Trust
A unit trust is a type of fixed trust where beneficiaries hold units of the trust, similar to how shareholders own shares of a company. This structure is commonly used in property investment trusts or joint ventures, providing a secure way for individuals to invest their money alongside other investors.
In a unit trust, each unit holder has a fixed percentage of interest in the trust’s assets. The trustee is responsible for managing these assets and distributing income to the unit holders based on their unit holdings. For example, if a unit trust has 100 units and an individual holds 10 units, they are entitled to 10% of the trust’s income and capital gains.
One of the significant advantages of unit trusts is the 50% discount on capital gains tax, making them an attractive option for investors looking to maximise their returns. This tax benefit, combined with the fixed nature of the trust, provides a stable and predictable investment vehicle.
8. Hybrid Trust
A hybrid trust combines elements of both fixed and discretionary trusts, offering a balance between the two. In a hybrid trust, the trustee has certain rights over the allocation or positioning of various assets under the trust, while also providing beneficiaries with a fixed interest in the trust’s assets.
Hybrid trusts are often used for tax planning purposes, as they allow for the distribution of income and capital gains to be tailored to the specific needs of the beneficiaries. For instance, a trustee might allocate a portion of the trust’s income to a beneficiary in a lower tax bracket, thereby minimising the overall tax liability.
This flexibility in tax management and asset protection makes hybrid trusts popular for individuals and families seeking to protect their assets and minimise their tax liability. By combining the benefits of fixed and discretionary trusts, hybrid trusts offer a versatile solution for effectively managing income and capital gains.
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Which Trust Is Right For You?
To understand how to pick the right trust for you, some questions are worth considering. 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 Australia has many different types of trusts.
The best way to decide is to research, find out what kind of investment options are available, and consider what details you’ll need to remember regarding beneficiaries, trustees, and third parties. Particularly, you’ll need to understand your assets, be it business, investment, or family assets, and whether they stand to be lost in certain circumstances.
Key Takeaways
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 through generations of family members or equally dealt out to beneficiaries of a company (as two examples).
- A trustee is an individual who manages the funds of the trust.
- A beneficiary is an 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 to whom you intend to distribute entitlements.
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.
Disclaimer
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.
