The “trust” is a powerful instrument that can create many financial, legal, or business benefits to your personal or commercial future. In the establishment of a trust, there are generally two (2) main trust structures that are commonly utilised, being a unit trust or a discretionary trust.
In simple words, a trust relationship sees the administrator of the trust, otherwise, known as the “trustee” holding and managing the assets of the trust (“trust fund”) for the benefit of those benefiting from the trust i.e. the beneficiaries.
The role of the trustee is to ensure the trust fund is controlled in accordance with the terms of the deed establishing the trust. The trustee can be either an individual or an entity and they become the legal owner of the trust’s assets. The responsibility of the trustee carried with it very strict obligations, including ensuring the trust adheres to its tax requirements and correctly distributes the trust assets to its beneficiaries.
This type of trust is a fixed trust that clearly identifies the beneficiaries (i.e. unitholders) and their proportion of interest held in the trust. The value of single units is determined by the value of the trust fund in its entirety. For example, if there are 2 unitholders who each own half of the units, each unitholder receives 50% of the distribution of the trust’s assets.
The Unit Trust structure provides certainty to the beneficiaries as to the benefit they will receive and possesses significant tax advantages. A Unit Trust is not a separate taxable entity, as a company, meaning it can have its income distributed prior to applicable tax being deducted.
A discretionary trust, on the other hand, is a non-fixed trust. This means a beneficiary’s entitlement is variable and at the discretion of the trustee. They elect the amount, as well as who and when the beneficiary will receive the benefit from the trust fund. This power provides the ability for the trustee to disburse funds in a way that provides the greatest advantages to beneficiaries. The terms of the discretionary trust deed will govern the powers of the trustee in distributing the income of the trust.
Establishing a trust can be an effective manner of minimising taxes, preserving wealth, and protecting assets. It is imperative that specific accounting and tax advice is also sought in conjunction with legal instructions to ensure the correct structure is established for your circumstances.