Trust

To put this simply, a trust is an arrangement where a trustee holds and manages assets on behalf of beneficiaries. Trust is not a separate legal entity, it is a relationship between the Trustee and the beneficiaries, which is bound by the trust deed. Trustee legally owns assets and manages them for beneficiaries.

Example: The Smith Family Trust is established to manage rental properties. A corporate trustee was appointed for better asset protection and continuity. The trustee holds the assets on behalf of the beneficiaries. According to the trust deed, the trustee has full discretion to distribute income and capital to any one or more beneficiaries each year. The beneficiaries then pay income tax at their marginal tax rates.

Things to consider..

Operating under a trust structure can offer several advantages, but there are important factors to consider before proceeding. The trust deed is a critical document that outlines the rules of the trust, including the powers of the trustee and the class of beneficiaries. It must be carefully drafted to ensure it aligns with the intended business and distribution strategy. The trustee, whether an individual or a corporate entity, holds legal responsibility for managing the trust’s assets and complying with all legal and tax obligations. A corporate trustee is generally recommended due to its benefits in asset protection and succession planning. The appointor, who has the power to appoint or remove trustees, also holds significant control, so careful consideration must be given to who holds this role and what succession provisions are in place. Beneficiaries must be properly defined in the deed, as distributions can only be made to those allowed. From a tax perspective, trusts are not separate taxable entities; instead, income is generally distributed to beneficiaries who are taxed individually. Failure to distribute may result in income being taxed at the highest marginal rate. There are also complex tax rules, such as Division 7A, personal services income (PSI), and trust loss provisions, which must be managed carefully. Trusts can provide asset protection, but this depends on correct administration and documentation. It is essential to maintain proper records, including annual trustee resolutions, financial statements, and tax returns. Additionally, funding of the trust, including loans, gifts or capital contributions, must be documented properly. Lastly, transferring assets into or out of a trust can trigger stamp duty or capital gains tax, depending on the circumstances and the relevant state laws.