The Role Of A Settlor In An Australian Trust Explained

Setting up a trust is a common way to protect assets, plan succession and manage family wealth in Australia. When you start looking into how trusts work, you’ll come across a key role that exists right at the beginning: the settlor.

Understanding what a settlor does (and what they don’t do) helps you set up your trust correctly from day one. While the job is brief, getting it wrong can create avoidable complications later - especially around tax, record-keeping and who can benefit from the trust.

In this guide, we’ll cover what a settlor is, how trusts are formed in Australia, what the settlor actually does during setup, who should (and shouldn’t) act as settlor, and some practical compliance tips. If you’re weighing up whether a trust is right for your situation, you may also find it helpful to review the broader context of trusts in Australia.

What Is A Settlor In An Australian Trust?

In simple terms, the settlor is the person (or sometimes an entity) who creates a trust relationship at its inception.

Traditionally, this happens when the settlor transfers a small amount of property or money (often called a “settlement sum”) to the initial trustee on the terms set out in a trust deed. That act of transfer - coupled with a properly executed deed - brings a discretionary or unit trust into existence.

A few important points about the settlor’s role:

• The settlor is involved at the very start, to establish the trust on the stated terms. After that, they do not manage assets or make decisions.
• The settlor is distinct from the trustee (who runs the trust) and the beneficiaries (who may receive income or capital from the trust).
• Most modern trust deeds expressly exclude the settlor from being a beneficiary to avoid conflicts and tax issues.

It’s also worth noting that not every trust starts with a nominal settlement. For example, a testamentary trust is created under a will and takes effect after death, and some unit trusts can be constituted by unit subscriptions under the deed rather than a token settlement. The key idea is that a trust needs clear terms and a transfer of property to a trustee to hold for beneficiaries - the mechanics of that first transfer can vary by trust type and deed drafting.

How Trusts Are Created (And When A Settlor Is Needed)

Before zooming in on the settlor’s actions, it helps to understand how a trust comes to life under Australian law.

At a high level, a trust arises when:

• A trustee (person or company) agrees to hold property on trust;
• There are identifiable beneficiaries (named or in a defined class) who may benefit; and
• The trust terms are certain - usually documented in a formal trust deed (for inter vivos trusts created during life) or a will (for testamentary trusts).

For inter vivos trusts like a typical family (discretionary) trust or a unit trust, a settlor commonly executes the trust deed with the initial trustee and makes a settlement or initial contribution, which the trustee accepts on the terms of the deed. That’s the settlor’s moment.

For testamentary trusts, the will-maker’s estate plan plays the role of “settling” the trust when assets pass under the will. There may be no separate nominal settlement by a third party in that scenario.

Regardless of structure, the trust deed is critical. It sets out trustee powers, distribution rules, appointment of new trustees, and eligibility of beneficiaries. Because the deed is a deed (not a simple contract), pay attention to execution formalities. If you’re weighing up when wet ink is required or when e-signing is acceptable, it’s prudent to consider the rules around signing a deed in Australia.

What Does The Settlor Actually Do?

In most inter vivos trusts, the settlor’s role is short and specific. Typically, the settlor will:

• Execute the trust deed with the initial trustee: This documents the trust’s terms, names the trustee and beneficiaries (or beneficiary classes), and sets out how the trust operates. If you’re curious about the nature of deeds generally, this overview of what a deed is can be useful context.
• Make the initial contribution: Often a small amount of money or property is handed to the trustee as evidence the trustee is now holding trust property on the deed terms. In unit trusts, this initial property might be the proceeds from initial unit subscriptions rather than a nominal sum.
• Step away: After settlement, the settlor’s job is done. They don’t retain decision-making powers, don’t control assets, and don’t receive trust benefits unless the deed is drafted otherwise (best practice is that they are excluded entirely).

Why the clean break? Keeping the settlor independent and separate from trust control helps preserve the legal integrity of the trust structure and reduces tax risk. If the settlor could later benefit or influence decisions, it can muddy the waters on whether the trust operates as a genuine trust for others.

Who Should (And Shouldn’t) Be The Settlor?

This is one of the most common questions we hear when people are establishing a family trust. The general rule of thumb is simple: choose a truly independent person or entity for this one-off role.

Good candidates

• A professional advisor (e.g. your accountant or solicitor) who is not a beneficiary and will not control the trust;
• A trusted friend or colleague with no personal interest in the trust; or
• An unrelated third party who is comfortable performing a one-off formality.

People to avoid (as a matter of best practice)

• Anyone who is, or could be, a beneficiary (including close family members for a family trust);
• Anyone who will act as trustee or appointor/principal with power to hire and fire trustees; or
• Anyone who might later receive distributions, reimbursements or other benefits from the trust.

These aren’t hard-and-fast “laws” that universally prohibit overlap, but they are well-established risk management principles. Most modern trust deeds go further and expressly exclude the settlor from benefiting under the trust. Keeping the role independent supports the trust’s purpose and avoids potential tax consequences if the person who “settled” the trust also ends up receiving trust income.

Practical tips when picking a settlor:

• Use a nominal amount you do not intend to return to the settlor later - avoid reimbursements of the settlement sum;
• Ensure the settlor’s full name, address and the settlement details are recorded cleanly in the deed; and
• Keep clear dated records of execution and the initial transfer (e.g. a receipt or bank record) in the trust file.

Key Documents, Tax And Registration Basics

Getting the paperwork right at the start saves stress later. Here’s a snapshot of the documents and registrations commonly involved once the trust is established.

Core documents

• Trust deed: The governing document the settlor and initial trustee execute. It sets beneficiary eligibility, trustee powers and distribution rules.
• Appointor/principal provisions: Many deeds name an appointor (also called a principal or guardian) who can remove and appoint trustees. This is the primary “control lever” in many family trusts.
• Trustee resolutions and minutes: After settlement, trustees typically record acceptance of office, bank account setup and initial administrative decisions via resolutions or minutes.
• Evidence of settlement: Keep a copy of the cheque or transfer and any receipt to confirm the initial property was transferred to the trustee.

ABN, TFN and GST

Not every trust needs an Australian Business Number (ABN). Trusts that carry on an enterprise for GST purposes will generally need an ABN, and most trusts that derive income will need a Tax File Number (TFN) to lodge trust tax returns. If the trust’s GST turnover meets or is likely to meet the $75,000 threshold, GST registration is required.

For a practical overview of identifiers and when they’re relevant, it’s worth reviewing trust ABN and TFN basics and speaking with your accountant for tailored tax advice.

If your trust will hold investments like company shares, you’ll also want to think about record-keeping around beneficial ownership. Here’s an overview of holding shares through a trust to help frame that decision.

Execution and storage

Because the trust deed is a deed, it must be executed in line with deed formalities. Some deeds still require wet-ink execution depending on the jurisdiction and the parties signing, so confirm what’s appropriate before you sign. If you’re unsure, these fundamentals on wet ink vs electronic signatures can help you navigate the options.

Store the original deed securely and keep certified copies with your accountant and bank. Good record-keeping - from the settlement receipt to trustee minutes - will make annual compliance and distributions far smoother.

Tax note: Trust taxation can be complex and highly fact-dependent. While this article gives general guidance about the settlor’s role, you should seek advice from a registered tax agent or accountant on your trust’s specific tax obligations.

FAQs: Common Questions About Settlors

Can I be the settlor of my own family trust?

It’s generally best to avoid it if you or related parties could benefit under the trust or will control trustee decisions. Using an independent person helps reduce tax and control risks and aligns with standard drafting practice (most deeds also exclude the settlor from benefiting).

Does the settlor need to contribute a large amount?

No. For inter vivos trusts, a nominal settlement is common (e.g. $10 or similar) to evidence the transfer of property to the trustee under the deed. Some structures (like certain unit trusts or testamentary trusts) are formed differently, so the “initial property” mechanism may vary.

Is the settlor responsible for the trust after setup?

No. Responsibility for the trust sits with the trustee from the moment the trust is established. The settlor’s job is typically a one-time act of settlement and execution of the deed.

Can the settlor be reimbursed for the settlement sum?

It’s better practice not to reimburse the nominal settlement amount to the settlor. Returning the settlement can create questions about whether the trust was genuinely constituted and introduce unnecessary tax risk.

What if my trust will run a business - are there extra steps?

If the trust will operate a business, you’ll likely need an ABN, a TFN, and potentially GST registration if the turnover threshold is met. You may also need business contracts, workplace policies and other documents depending on your operations. If you’re still deciding whether a trust structure suits your plans, this broader guide to trusts and asset protection is a good starting point.

What else should I consider when executing the deed?

Make sure the deed is dated, properly signed and witnessed as required. The trustee should promptly open a bank account in the trust’s name and record initial decisions in trustee minutes. Because execution requirements can be technical, getting tailored legal advice before signing is a smart move.

Key Takeaways

• The settlor’s job is to bring the trust into existence - usually by executing the trust deed with the trustee and transferring initial property - and then step back.
• Best practice is to appoint an independent settlor who will not benefit from the trust and will not control it as trustee or appointor.
• Not all trusts look the same at inception: family and unit trusts commonly use a nominal settlement, while testamentary trusts arise under a will when assets pass to the trustee.
• Keep your documentation tidy: signed deed, evidence of settlement, trustee minutes and correct execution are all important. Consider the nuances of signing a deed in your jurisdiction.
• Only trusts that carry on an enterprise will need an ABN; most income-earning trusts will need a TFN, and GST registration is required if the turnover threshold is met - speak with your accountant for personalised tax advice.
• If your trust will hold investments or run a business, plan early for governance, record-keeping and the right contracts; where relevant, review the broader landscape of trusts and asset protection in Australia.

If you’d like a consultation on setting up a trust the right way for your situation, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.