A trust of property is an obligation on the trustee to hold property or income for a particular purpose on behalf of other people. There are a number of different types of trusts:
- discretionary trusts
- unit trusts (public & private)
- a combination of a unit & discretionary trust (hybrid)
- fixed trusts
- testamentary trust
- inter vivos trusts
What are family trusts
Family trusts are typically discretionary trusts with family members as the beneficiaries. Discretionary trusts are so called because the trustee has a discretion as to which beneficiaries he or she may pay income or capital. Income can usually be paid to one beneficiary at the exclusion of another. The potential pool of discretionary beneficiaries is usually set out in the trust deed.
The essential elements of a trust are:
- a constituent document (the trust deed) although a trust can be created orally or implied
- trust property
- obligations in relation to the trust property a set out in the trust deed
For law purposes, a trust is considered to be a separate legal entity although this is not the case in general law. In any event the trust is required to determine its net trust income and lodge an income tax return. If the trust has net distributable income, the income will generally be distributed to beneficiaries and is taxed in the beneficiary’s respective tax returns as the margin tax rates. Income retained by the trust is generally taxed at the top marginal rate plus medicare levy.
Advantages & disadvantages of trusts
The advantages and disadvantages of trusts vary depending on the type of trust it is.
Generally speaking, the major disadvantage of a trust structure is that it cannot distribute losses to its beneficiaries.
The major advantage, particularly in the case of a discretionary trust is the ability to split income amongst the pool of beneficiaries. A benefit can be obtained by directing income to members of the family with low marginal income tax rates.
The trust loss regime is more severe than for companies. However, if the discretionary trust elects to become a family trust this advantage can be eliminated.
CGT exemptions available to the trustee can be passed on to beneficiaries.
If the trust is structured correctly, it will provide considerable asset protection against personal creditors.
For more details about trust funds, contact LCD&Co.
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