What is a Trust?

A trust in its simplest form is best described as an arrangement between people where one person, known as the trustee, holds and manages property or assets for the benefit of another person, known as the beneficiary. This arrangement is recognised legally.

Trusts are often used for both legal and financial purposes, including estate planning, asset protection, and charities.

A different person sets up the trust and decides who the trustee and beneficiaries will be. This person is known as the settlor. The settlor puts the assets in the trust and the trustee then manages the assets for the benefit of the beneficiary. There can be multiple beneficiaries.

A trust is set up using a trust deed. A trust deed is a legal document, and it tells the trustee what they can and can’t do.

The trustee can be a person or a company. Generally, the trustee must manage the assets according to the trust deed in the best interests of the beneficiaries.

Beneficiaries are the ones who receive benefits from a trust. They can be people or organisations.

There are different types of trusts and each one can have different legal and taxation outcomes.

The different types of trusts are:

Discretionary Trust: In this case the trustee can decide how income and assets of the trust are given to beneficiaries.
Unit Trust: The beneficiaries hold units in the trust, like shareholders in a company, and their share of income and assets is decided by the number of units they hold.
Testamentary Trust: Created by a Will and starts to operate when the settlor dies.
Family Trust: Used for managing family assets and providing for family members.
Charitable Trust: Used for charitable purposes which benefit the public.

Why have a trust?

Estate Planning: To manage a person’s assets as they wish when they die.
Asset Protection: To protect assets from legal claims.
Tax Planning: To manage tax the best way legally possible.
Charities: To support charitable causes.

The Law

In Australia, trusts are governed by both state and federal laws and by judges in the Courts. The laws can be different in each state. Federal laws apply to the whole of Australia.

You need people who understand the laws and how tax works to give advice before setting up a trust. Lawyers and accountants usually work together to set up trusts. The lawyer writes the trust deed and the accountant manages the taxation affairs of the people involved.