A trust must have the following key elements:
• It must have a trust property;
• It must have a trustee that holds the legal title to that trust property; and
• It must have beneficiaries for whom the trustee is to manage and apply the trust property.
A trust is a relationship between the corporate entity, the discretionary family trust and the beneficiaries. It is not a separate legal entity except for some taxation purposes. The trust deed is the legal document that defines the relationship. It identifies the beneficiaries and outlines the trustee’s obligations and duties. In addition to the three key elements a trust may also have an appointer or guardian. The appointer plays a critical role in the asset protection benefits that can be achieved through the use of a trust.
Discretionary trusts are generally created by a person (the settlor) gifting a nominal sum (the settled sum, for example $10) to a natural person or company also known as the trustee. The settled sum is held by the trustee for the benefit of the named persons or beneficiaries. The class of beneficiaries usually include the named beneficiaries’ relatives and companies or trusts in which any of those persons hold shares or are beneficiaries. The settlor’s gift and the trustee’s acceptance of its obligations in holding and managing the trust property are acknowledged and agreed when the parties execute the trust deed. The settled sum is the initial trust property.
Subsequently, the trustee is able to add to the trust property by borrowing, receiving gifts or acquiring other assets.
Generally, the trust deed of a discretionary trust will provide for an appointer, primary beneficiaries and general beneficiaries.
Under a discretionary trust, the trustee holds the legal title to the assets of the trust and also conducts the day to day operation of the trust. (which may include the operation of a business). The trustee often has a complete discretion as to which, if any, of the beneficiaries may benefit from any of the capital or income of the trust.
The beneficiaries of a trust should not be related to the settlor. Proceeding in this manner will ensure the revocable trust provisions contained in section 102 of ITAA 36 will not be available to the Commissioner to tax the trustee on any of the income of the trust on the basis the income was additional income derived by the settlor.
The beneficiaries of a discretionary trust are mere objects of the trust. The beneficiaries do not have any enforceable rights over the assets or income of the trust but merely have a right to be considered when the trustee makes distributions.
If you are considering setting up a trust it’s important you fully understand what is involved. The lawyers and accountants at The Quinn Group can not only provide you with advice in this area, but can also set up the trust on your behalf. Call 02 9223 9166 or submit an online enquiry at www.alltruststructures.com.au