What You Need to Know About Trusts: Understanding Their Structure and Purpose in NSW
Trusts are a popular legal and financial structure used for asset protection, wealth distribution, estate planning, and taxation efficiency. However, many people do not fully understand how a trust operates or the key roles involved in maintaining one. This article provides a clear overview of how trusts function under New South Wales law and outlines why getting the structure right from the beginning is critical. For more advanced estate planning tips, see our guide on Estate Planning and Testamentary Trusts.
What Is a Trust?
A trust is a legal relationship—not a separate legal entity—where one party (the trustee) holds and manages property or assets for the benefit of others (the beneficiaries). Although not a legal entity in its own right, for some taxation purposes, a trust is treated as a distinct entity.
At its core, a trust must involve four essential elements:
- Settlor – The person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor.
- Trust Property – There must be an asset or property that forms the basis of the trust.
- Trustee – A person or company must hold legal title to the trust property and manage it in accordance with the terms of the trust.
- Beneficiaries – The individuals or entities for whose benefit the trustee manages and applies the trust property.
Additionally, many discretionary trusts will appoint an appointor (also known as a guardian), who has the power to remove or replace the trustee. This role can be crucial in maintaining control and ensuring the trust continues to align with the intentions of the original parties.
The Trust Deed: The Foundation of the Trust Relationship
Every trust is established and governed by a legal document known as a trust deed. This deed sets out the terms of the trust and outlines the rights and obligations of the parties involved. It specifies:
- The initial trust property (often a nominal amount called the settled sum)
- The roles of the trustee and appointor
- The categories of beneficiaries (e.g. primary and general beneficiaries)
- How and when distributions may be made
- Powers available to the trustee in administering the trust
- Termination of the trust
The deed is a critical legal document. If not drafted carefully, it can cause disputes or unintended tax consequences. It’s essential to seek legal advice before setting up or making changes to a trust deed.
Discretionary Trusts: Commonly Used for Families and Small Businesses
A discretionary trust—commonly referred to as a family trust—is the most frequently used structure for asset protection and tax planning in NSW. It is typically established when a settlor (a third party unrelated to the beneficiaries) gifts a nominal amount (e.g. $10) to the trustee, who agrees to hold and manage that sum under the terms of the trust deed.
The trust may then acquire additional property or assets through gifts, loans, or commercial transactions. The trustee, who may be a person or a corporate entity, has broad discretion to determine:
- Which beneficiaries receive distributions of income or capital
- How much each beneficiary receives — for insights on how these decisions can impact tax outcomes, see our article on Tax Considerations for Trusts.
- When distributions are made
This discretionary power is what gives the trust its flexibility—particularly useful in family estate planning and small business structures.
Beneficiaries and Tax Considerations
Beneficiaries under a discretionary trust are referred to as objects of the trust. They do not have an automatic entitlement to trust income or assets, but rather a right to be considered by the trustee when distributions are made.
For taxation purposes, care must be taken in the structuring of a discretionary trust. Under section 102 of the Income Tax Assessment Act 1936 (Cth), if the settlor retains certain interests or control over the trust, the ATO may assess trust income as additional income of the settlor under anti-avoidance provisions. Therefore, the settlor should not be a beneficiary, and their involvement in trust operations should be minimal.
It’s also important to understand how trusts interact with asset sales and investment gains—our article on Trusts and Capital Gains Tax explains more.
Why Use a Trust?
Trusts can offer significant benefits, including:
- Asset protection from creditors or family law disputes
- Tax efficiency, allowing income to be distributed to beneficiaries in lower tax brackets
- Succession planning, enabling assets to be passed to the next generation with control
- Business structuring, separating asset ownership from operational risk
However, these benefits are only achieved if the trust is correctly established, operated in accordance with the deed, and complies with current legal and taxation requirements.
Final Thoughts
Trusts are powerful legal instruments, but they must be tailored to individual circumstances and managed with care. If you are considering establishing a trust for estate planning, asset protection, or business purposes, it’s essential to seek professional legal advice. A well-drafted trust deed and a properly appointed trustee are fundamental to ensuring the structure serves its intended purpose.
NEED HELP on Setting Up or Reviewing a Trust?
If you are considering setting up a trust it’s important you fully understand what is involved. The tax lawyers and accountants at The Quinn Group can assist with the creation, amendment, or legal review of trust deeds. We also provide strategic advice on the use of trusts in estate planning, family business structures, and asset protection strategies.
Call us on 02 9223 9166 or submit an online enquiry at www.alltruststructures.com.au
