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Setting up a trust is a common way to hold property for someone else. In fact, lots of businesses rely on trusts for their business structure as it’s a great way to protect assets and manage taxes.
Put simply, a person or company (trustee) holds property for the benefit of another party (the beneficiary).
A trust is not a separate legal entity. It’s worth noting that the assets of the trust are legally owned by the trustee, who must then deal with those assets in the interests of the beneficiaries.
There are different types of trusts which come with a different set of rules, so it’s important to know the difference between them. For example, what is the difference between a discretionary trust and a unit trust? When might a corporate trustee be of value?
Let’s go through some key features and differences.
Discretionary Trusts
A discretionary trust, also commonly called a family trust, is mostly used by families for tax planning purposes.
So, what makes discretionary trusts different?
The key distinguishing feature about discretionary trusts is how profits are distributed. As the name suggests, the trustee has the power and discretion to decide which of the beneficiaries will receive how much of the profit.
In other words, the amount received from the trust isn’t fixed or guaranteed.
However, the trustee doesn’t necessarily have unlimited power in this sense. Their conduct is still subject to the terms in the trust instrument itself.
Unit Trusts
Unit trusts distribute profit according to how many units each beneficiary holds. They represent a portion of what you receive.
So, they are different to discretionary trusts in that it is a fixed amount, rather than the trustee’s decision.
Who Is Involved In A Trust?
A trust relationship usually involves 3 main parties.
1. Trustee
As we mentioned, the trustee is the entity responsible for executing and managing the trust. This means they are under an obligation to manage the trust’s assets in a way that is in the best interests of the beneficiaries.
Trustees legally own these assets, so it also means they are personally liable for the trust’s liabilities (although this is different for corporate trustees – we’ll discuss this later).
2. Beneficiaries
Beneficiaries of a trust are the parties that receive the benefit.
3. Settlor
The settlor is usually an unrelated third party that signs the trust deed.
Why Should I Set Up A Discretionary Trust?
Setting up a discretionary trust comes with several benefits.
- Assets are well protected
- Less formality
- Good for tax planning purposes (where the trustee has the discretion to decide where the benefit goes, it makes things a lot easier in terms of tax planning)
- Unlimited number of investors in a trust
What Is A Corporate Trustee?
Like we mentioned, a trustee is someone who holds the property for the beneficiaries (and in a discretionary trust, they decide how much of what each party gets).
So, it’s important to note that this trustee can be a person or a company. Either way, this trustee is under a duty to act in the best interests of the beneficiaries.
If a trustee is a company, this is known as a corporate trustee. This kind of trust requires an appointed director and shareholders.
Unlike individual trustees, corporate trustees can have better protection with respect to liabilities. So, corporate trustees’ liability is limited to corporate assets rather than personal assets.
Need Help?
Setting up a trust is an exciting way to manage property and plan ahead for your business, but it can also become complex and confusing if you’re not getting the right guidance.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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