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DISCRETIONARY (FAMILY) TRUSTS

LEGAL UNIT TRUSTS IN MELBOURNE

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Behan Legal Unit Trusts

Of the many legal structures designed to hold and distribute assets, the trust is one of the most flexible. The trust is a legal relationship in which the Trustee holds trust property for a Beneficiary under the Trust Deed.

This trust is discretionary and allows the Trustee to control the trust property without having beneficial ownership. The Trustee can determine which Beneficiaries will receive benefit from income and from capital gains.

A trust exists where a person (known as a trustee) holds or has title to property, of which he is not the owner in his own right, for the benefit of any person (known as a beneficiary) or for any purpose. The trust is an ancient English law invention. Families to hold protect, and pass on their property from one generation to the next have used it for many centuries. The uses of trusts and their flexibility have increased ever since. They are now used not only by individuals and families but also by institutions in some of the most complex commercial transactions.

A written trust deed is normally used to record the instructions of the person establishing the trust (known as the Settlor or grantor). The deed sets out the terms of the trust and provides details of the manner in which the trust property is to be administered and distributed. The distribution instructions may nominate individuals for benefit, postpone the interests of individuals for many years, or, more usually, provide for the selection, by the trustees themselves, of those who are to benefit.

Discretion (in a discretionary trust) is given to the trustees not only in the distribution of trust property but also in its investment and management. Unlike the limited company, in the case of a trust there is generally no need to register, or otherwise make public, the ownership of trust property, its administration, or even its very existence. Trustees are subject to high standards of professionalism. They are obliged, by statute, to enforce the trust and are liable to the beneficiaries for breach of their duties.  

TRUSTEE

The Trustee must use its legal entitlement for the Beneficiary’s benefit, and comply with the Trust Deed. It holds any trust property legally, i.e. trust assets registered in the name of the Trustee even though it acts for Beneficiaries. The Trustee can be either an individual or a corporation. The advantages of using a corporation are:

a)    Limited liability

b)    No succession problems

c)    Additional credibility with others  

BENEFICIARIES

A Trust must have identifiable beneficiaries and a Trustee may be a beneficiary.  

APPOINTOR

This person can appoint or dismiss a Trustee and for asset protection, is normally an external independent person.

SETTLOR

The Settlor creates the trust by settling the initial trust assets on the Trustee. To avoid taxation implications, the Settlor is normally an external independent person who has nothing further to do with the trust after its establishment. When establishing the trust the Settlor can determine which Beneficiaries can receive benefits under the trust.

It is not prudent to add or vary the trust after its creation as this can invoke a re-settlement (in other words, the creation of a new trust), which can attract capital gains taxation and additional stamp duty.  

FIDUCIARY RELATIONSHIP

The Trustee has a fiduciary relationship to the Beneficiaries and must exclusively serve the interests of the Beneficiaries. The Trustee cannot pursue separate personal interests and must pursue the interests of the Beneficiaries. The Trustee has a right of indemnity against trust assets. However, if the Trustee has breached its fiduciary duty to the beneficiaries, then the Trustee is personally liable to account for any private profits.  

COMMENCEMENT OF TRUST

It is essential, for taxation purposes, to show when the trust commenced. Evidence of execution of the Trust Deed is, on its own insufficient to establish the existence of the trust. It may be necessary to show commencement by showing that the Settlor handed the settled sum to the Trustee on or before a particular date. Without opening a bank account and depositing the settled sum into that account, it may be difficult to establish that this in fact occurred. Often, we lodge the settled sum into the trust account, which is sufficient evidence of establishing the trust.  

PROPER PURPOSE OF TRUSTS

a)    Protect assets

b)    Succession and continuity of ownership

c)    Division income and obtain taxation benefits

The proper use and implementation of the discretionary trust can result in asset protection and taxation benefits. Corporate beneficiaries or individuals on lower marginal tax rates can receive distributions under the trust, but special provisions apply to distributions of income to children under the age of 18. However, if there are tax losses or shares acquired by the Trustee after 31 December 1997 carrying imputation credits, it may be necessary for the Trustee to make a "trust election”.  

READ THE TRUST DEED

There is no such thing as a standard Trust Deed, and by not reading the Trust Deed assuming it is standard, is negligent. You must ensure your accountants not only read the Trust Deed but also understand its terms and obligations.

NEED MORE INFORMATION

Behan Legal assists and advises on these important issues. For an appointment, call 03 9646 0344 .

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