A trust is an arrangement where one party, the trustee (either a person or a company), carries on business and holds assets for the benefit of the other parties, the beneficiaries.

The most common form of trust is a discretionary trust, also known as a family trust. All income of the business goes into the trust and the trustee has the power to decide how to distribute the income to the beneficiaries. The rules by which the trust is managed are contained in a trust deed.

  • A trust is a complex structure which has to comply with specific regulations, so establishing a trust needs to be done by a solicitor or accountant – this can be expensive
  • Ownership of the business by a corporate trustee provides asset protection and limits liability in relation to the business
  • Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates, therefore, income distributed to children under 18 may be taxed at higher rates than adults
  • Beneficiaries of a trust are generally not liable for the debts of the trust – assets of the trust may be controlled by the beneficiaries but they are not owned by them.

There are various forms of trusts including:

  • A Unit Trust is where beneficiaries have a fixed interest in the capital and income of the trust, which is represented by units.
  • A “Discretionary” Trust is where the beneficiaries’ entitlement to the capital and income of the trust is at the discretion of the trustee.
  • A trust that has fixed and discretionary interests is usually referred to as a Hybrid trust.

Business characteristics that suit a trust structure

Unit trust

  • Where losses are not likely
  • Where ownership needs to be defined

Discretionary trust

  • Where losses not likely
  • Where involves appreciating assets
  • Where stakeholders are all related parties
  • Where allocation of profits changes from year to year

There are definitely more advantages and some disadvantages to Trusts including losses being trapped within the Trust and not available to beneficiaries in these loss years, but your best option is to come and talk to us and we will guide you through a structured process to find what structure is best for you.

If you have any questions about trusts or just not sure which trust will suit you, then call (02) 9997 7646 or fill in a Contact Us form and a BWD Accountant will help you out.