A trust is a legally recognised relationship where one party holds property for the benefit of another party. The first party is known as the trustee, and the second party is known as the beneficiary. A trustee can be an individual, a group of people or a corporation. Trust law holds that a trust can have more than one trustee and also more than one beneficiary. Trustees have a special kind of duty to beneficiaries, known as a fiduciary duty. This means that trustees have a duty to act in the best interests of beneficiaries and must avoid conflicts of interest that could interfere with this.
Trustees are personally liable for debts of the trust. This is because legally, the trust assets and liabilities belong to the trustee. However, if the trust has liabilities, the trustee can meet those obligations using the trust assets. A trustee must also make sure that their personal assets are kept separate from those of the trust.
A trust fund can relate to any property such as cash, real estate or shares. A trust usually has a trust deed that sets out how the trust is to be operated.
Trust law: what are trusts used for?
Trusts are very common in businesses, investment planning, and organising financial affairs within families. Some examples of trusts that operate in everyday life include:
- Superannuation funds are trusts;
- A child may have money held in a trust fund for them by an adult;
- A lot of small businesses are structured as trusts;
- Accountants, solicitors and real estate agents all hold trust funds;
- Executors of deceased estates act as trustees
The benefits of using trusts depend on the type of trust and the purpose for which it is used. Some of the benefits may include tax minimisation and, in the context of businesses, asset protection from potential lawsuits or creditors.
Different types of trusts
There are several different types of trusts. These include:
- Fixed trusts. In this type of trust, the trustee holds trust assets for specific beneficiaries for fixed proportions.
- Unit trusts. Beneficiaries in unit trusts hold their interests in “units”, similar to how shareholders hold their interests in the company to which the shares relate. Often the beneficiaries for this type of trust are referred to as unitholders. Unitholders can transfer their interest in the trust by selling them to a buyer. Usually, unit trusts are found in the context of property, managed investment funds and joint ventures.
- Discretionary trusts. Sometimes, discretionary trusts are referred to as “family trusts” as they are often used for financial planning within families. The beneficiaries of this type of trust do not have a fixed interest in the trust property. Still, according to trust law, the trustees can decide whether the beneficiaries are entitled to income or capital from the trust and, if this is the case, how much.
- Bare trusts have only one trustee and one beneficiary. The beneficiary has complete legal control of the trustee. An example of where a bare trust may be found is where shares are held on trust for a beneficiary who seeks to maintain their privacy.
- Hybrid trusts are mixtures of fixed and discretionary trusts.
- Testamentary trusts are those which, according to trust law, are established on the death of the testator.
- Charitable trusts are set up as structures that allow for the operation of philanthropic organisations. As such, these organisations can enjoy many tax concessions and deductions.
- Superannuation trusts. All superannuation funds in Australia are set up and operate as trusts according to trust law. The trust deed for these entities set out how members’ entitlements are to be calculated.
Setting up a trust
Under trust law, it is not essential that documentation exists for the existence of a trust to be established. However, it is advisable to have formal documentation for the establishment of a trust. The legal documents are usually the declaration of trust, the deed of settlement and the trust deed.
In the declaration of trust, the trustee declares themselves as the trustee for the property held in the trust for the benefit of the beneficiaries. The deed of settlement is the document by which the property is transferred from the owner to the trustee on the condition that they hold it for the beneficiaries. The trust deed sets out any rules of operation that apply to the trust.
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