The fundamentals of a Trust
27 May 2019
What is a trust?
A trust is an agreement whereby a person or other entity agrees to hold an asset for the benefit of others.
Put simply, the person or other entity that agrees to hold this asset is commonly called, the trustee, and those that benefit from this are called, the beneficiaries.
Once the trust is created, a document named “the trust deed” specifies how the assets are to be managed. In simple terms, if the trust is to make income for the financial year, the beneficiaries will include their share of the trusts net income in there personal tax return for that corresponding year.
While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration, such as income tax and GST purposes. Of this, it is the trustee’s responsibility for the management of the tax affairs of the trust i.e. registration of the trust, tax obligations and liabilities.
How is a trust established?
The setup of a trust is done via a formal deed – which will have to be in place, which outlines the operation of the trust, accompanied by annual obligations for the trustee.
The trust is established by, the settlor, an independent person (commonly your accountant, as this person cannot be a beneficiary of the trust) who makes a gift of a sum of money (the settled sum) to a person or other entity (the trustee) for the benefit of nominated persons set out in the trust deed (beneficiaries).
Key terms and definitions to be aware of in relation to the foundations and running of a trust
- Settlor – this is the person who gifts the initial trust property to form the trust, also known as the settled sum. Besides making this gift, the duties of the settlor moving forward are very limited and would not get involved in any further than this in the activity of the trust
- Appointor – has the power to control the trustee i.e. capacity to both appoint and replace the trustee – per the deed of settlement
- Guardian – whereby a guardian is in place – this office will give consent to capital and income distributions by the trustee. Certain actions and powers of the trustee – per the trust deed – can only be done with consent of the guardian
- Trustee – Typically an individual or a company. As the trustee can be liable for the actions in its capacity as trustee (such as trading breaches and negligent acts), generally the suggested structure would be to setup a trustee company, therefore reducing the risk of exposure to personal assets, if the individual was to be the trustee. The trustee also has the power to determine which beneficiaries receive the income and capital for the given period, and having flexibility to be versatile with the distribution. Key point to be aware of, the trustee is the legal owner of the trust property, although not the beneficial owner, i.e. holds the assets on behalf of the trust. Running the everyday operations of the trust – according to the terms of the trust deed – is the main responsibility of the trustee.
- Beneficiaries – As mentioned above, beneficiaries will receive the income or capital (per the trust deed) according to the trust resolution drawn up for the period, as allocated by the trustee. This income will be reported accordingly in the own return. Beneficiaries will be defined clearly in the trust deed, upon formation.
- Vesting Day – in Western Australia, the vesting period of trust deeds remains for 80 years from the date of formation of the trust. This meaning, the trust must cease to exist/terminate at a date no later than 80 years.
Why choose a trust and how does it operate?
- The trustee, per the trust deed, will contract on behalf of the trust
- Again, the duties of the trustee is to ensure that the trust is registered with a TFN, ABN, and GST registration where applicable and the lodging of the tax returns etc..
- As mentioned under trustee duties, the trustee will manage most business/commercial responsibilities, as governed by the trust deed, allowing the trustee to manage the trust
- Asset protection is one of the key advantages for choosing a trust, as mentioned if the setup of the trustee is done via a company
- Provides great flexibility for the distribution of income and capital for any given period, so long as the type of income is distributed appropriately per the trust deed
- Existence of the trust – 80 years in Western Australia – provides great long term capabilities
Other matters to consider
- It is the trustee’s duty to ensure that for each respective income year a trust tax return is lodged, despite the level of income for that year
- The trustee is responsible for ensuring that the trust has a valid TFN, which to make clear, is the TFN for the trust and not the trustee.
- Trustee resolution – this is a common document produced every year that states the trustees decision to distribute the income or capital for the given period. This distribution must be prepared and signed by 30 June every year. Income every year is distributed accordingly based on the trustees decision made under this document – for income and/or capital as defined under the trust deed
- If a family trust election has been drawn up for the trust – ensure all distributions are made within the family group
Contact the team at Shakespeare on 08 9321 2111 if you’d like to discuss how the above may apply to your individual circumstances.
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