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Why set up a trust?There are many reasons someone would choose to set up a trust. These include:
What does a trust need?Any trust needs a number of elements before it can start operating: The settlor: The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons, the settlor should not be a beneficiary under the trust. The trustee: The trustee (or trustees) administers the trust. The trustee owes a duty directly to the beneficiaries and must always act in their best interests. All transactions for the trust are carried out by and in the name of the trustee. The beneficiary or beneficiaries: The beneficiaries are the people or companies for whose benefit the trust is created and administered. Beneficiaries can be either primary beneficiaries (who are named in the trust deed) or general beneficiaries (who often are not named individually). General beneficiaries are usually existing or future children, grandchildren and relatives of the primary beneficiaries. The trust deed: The trust deed (or, in the case of a testamentary trust, the will) is the formal document which sets out how the trust will run and what the trustee is allowed to do. It is very important that the trust deed or will is drafted by a solicitor. The appointor: Many, but not all, trusts also have an appointor. The appointor is very important as they have the power to appoint and remove the trustee. What different kinds of trusts are there?There are many different kinds of trust. As well as the types of trust described below, trusts include superannuation funds, charitable trusts and special disability trusts. The two main types of trusts which are used in business and by individuals are: Discretionary (or family) trust: A discretionary trust or family trust is the most common form used by families. The beneficiaries of the trust have no defined entitlement to the income or the assets of the trust. Each year, the trustee decides which beneficiaries are entitled to receive the income and how much they should get. For this reason, discretionary trusts have become popular in family tax planning. Fixed or unit trust: Unlike a discretionary trust, the beneficiaries of a fixed trust have a defined entitlement under the trust, similar to a shareholder in a company. This is usually done by dividing the trust into units in much the same way a company is divided into shares. The trustee does not have any discretion as to how they distribute the trust’s capital and income. A fixed or unit trust is often used for joint venture arrangements – for example, two families want to own an asset together. How long does a trust last?In NSW, a private trust can last for up to 80 years. The trust deed will set out how long it should last and can specify a shorter term – often based on a specific event happening, such as someone dying or reaching a certain age. The date when a trust reaches the end of its term is known as the ‘vesting date’. What happens on the vesting date?When a trusts vests the beneficiaries become absolutely entitled to all of its assets and income. The trustee must distribute all assets and income to them in line with the trust deed. A trust deed will usually have a set of rules the trustee must follow when doing this. Does a trust pay tax?A trust has its own tax file number and is required to lodge tax returns annually. However, the trust generally is not subject to tax if all its annual income is distributed to beneficiaries, who pay the tax based on their marginal rate of tax. Where the trust conducts a business enterprise it can register for both an ABN and GST. Find out more:
The settlor has a limited but fundamental role in creating a trust. A trust does not exist until the settlor expresses an intention for the trust to exist and transfers the settled sum to the trustee. If a settlor is not independent to the trust serious tax consequences arise. Bridie O'Shannessy, Maddocks Lawyers Role of a discretionary trustThe primary role of a discretionary trust is to provide asset protection to the class of persons who are the primary beneficiaries of the trust (as well as to allow those beneficiaries to achieve tax savings through income splitting). The settlor has an important role to play in a discretionary trust in ensuring this asset protection objective is met. Role of the settlorThe settlor must hand over the settled sum to the trustee to be held on the terms of the trust for the benefit of the beneficiaries. The trustee must issue a receipt to record this has occurred. This is the point at which the trust is created because, by executing the trust deed and providing the settled sum:
The settlor then steps out of the picture. Why should the settlor's role be limited to establishing the trust?There are tax implications under the Income Tax Assessment Act 1936[1] where a settlor creates a trust and:
In such a case, the trustee of the trust will be assessed as having to pay income tax on the income of the trust by the ATO, rather than income tax being assessed in the hands of the beneficiaries of the trust to whom distributions are made. For this reason, it is advisable to limit the settlor's role in a trust to the initial establishment of the trust and payment of the settled sum. To avoid the perception that the settlor's declaration of trust is revocable, the settlor should be unrelated to the trustee and the beneficiaries of the trust. This is why the Cleardocs discretionary trust deed expressly prohibits the settlor (or their children) from being a beneficiary of the trust or otherwise receiving a benefit from the trust. More information from MaddocksFor more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team. More Cleardocs information on related topicsYou can read earlier ClearLaw articles on a range of trust topics. Order Cleardocs trust packages
[1]Section 102 of the Income Tax Assessment Act 1936 (Cth). Can a settlor be a beneficiary of a trust Singapore?Subject to tax and other considerations, it may be possible for the settlor and the trustee to be the same person. In some cases, a settlor or trustee might also be a beneficiary of the trust.
Can settlor be beneficiary of a trust in Australia?The settlor: The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons, the settlor should not be a beneficiary under the trust.
Can a settlor be a beneficiary of a trust NZ?In conclusion, it is possible to be both a beneficiary and a trustee of a trust in New Zealand. However, if you are in this situation, it is good to keep in mind the duties that a trustee has to a trust – mainly that a trustee cannot exercise their power for their benefit.
Is it a settlor or beneficiary?A settlor is the person who actually creates the trust by transferring property to a trustee to be held and administered for the benefit of the beneficiary. The settlor generally arranges to have the terms of the trust drawn up according to their wishes.
Can a settlor be a beneficiary of a discretionary trust UK?As well as being the settlor, he is also the beneficiary as the trustees will be able to make payments of either capital or income to him. It is also important to remember that the appointment of the settlor as a trustee only would not have the same effect.
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Can a settlor be a beneficiary of a trust
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