What is a Trust?

What is a Trust?

A Trust is an entity created to hold assets for the benefit of certain persons or entities, with a trustee managing the Trust (the legal owner). Most Trusts are founded by the person (settlor) who executes a written deed of Trust which establishes the Trust and sets out the terms and conditions upon which it will be administered.

 

Types of Trusts

There are generally three ways in which a Trust can be created. Those created during the settlor’s life time (inter vivos Trusts), those created by Will, which is on the death of the testator (Testamentary Trusts) and then those created at law. Below is a table outlining some of the more common Trusts created during one’s life time and upon death.

Inter Vivos Trusts

Testamentary

Trusts

Family Discretionary Trust

Minor’s Trust

Unit Trust

Life Interest

Hybrid Trust (combination of a Unit and Discretionary Trust)

Right to Reside

Bare Trust

Discretionary Trust

Fixed Trust

Protective Trust

Special Disability Trust Special Disability Trust

Education Trust

Education Trust

Advantages and Disadvantages of a Trust

Historically Trusts were used as a tax minimisation vehicle but over the years the Australian Government has removed many of the tax advantages afforded to the Trust structure. Today the main reasons an inter vivos Trust is created is for the purposes of investment, operating a business or for asset protection.

As outlined above there are numerous types of Trusts and each Trust is distinct in character therefore having their own advantages and disadvantages.

Generally speaking all Trusts can be placed into two categories; fixed or discretionary.

A fixed Trust simply means that the interest of beneficiaries of the Trust is defined, that is their entitlement to income and/or capital is fixed in percentage terms. For example in a bare Trust where there is one beneficiary and that beneficiary is entitled to 100% of the income and capital of the Trust.

A Discretionary Trust on the other hand means the Trustee of the Trust decides who of the many potential beneficiaries will be entitled to the income and capital in any given year. Therefore no one beneficiary has an absolute entitlement to the income and/or capital of the Trust.

In addition to Trusts which are fixed or discretionary there are also Trusts which are a hybrid of the two. For example the Trust terms may include fixed entitlements to capital but the Trustee has the discretion to pay the income to one or more of the beneficiaries or to accumulate (ie keep the income in the Trust rather than pay it to a beneficiary).