What is a trust?

A trust is a legal obligation or arrangement by which a person, known as the trustee, uses his or her legal position as trustee to benefit the “objects” of the trust.  The objects are referred to by most people as the “beneficiaries”.  The trustee is like Santa Claus and he can distribute presents to whoever he chooses as long as they are one of the beneficiaries of the trust.

Are there different types of trusts?

There are many different types of trusts but by far the most common trust is the discretionary trust.

What is a discretionary trust?

A discretionary trust is a trust in which the trustee has a discretion to distribute capital and income to the beneficiaries as the trustee thinks fit.  Due to the discretionary nature of the trust the beneficiaries have no ownership of the property held by the trustee.

What a trust is not

Unlike a company a trust is not a separate legal entity.  A person can own property in his or her own right.  A company can also own property in its own right.  In the case of a trust any property is held by the trustee, not the trust.

Why Have a Trust?

Trusts are set up for various purposes but the most common reasons are keeping assets safe and splitting income to minimise income tax.

Do Trusts Pay Tax?

As a trust is not an individual or a company it does not pay tax. The beneficiaries pay tax on income distributed to them from the trust.  However, trust tax returns are required to be lodged for the trust and a trust has its own tax file number. This accounting treatment of trusts leads some to wrongly conclude that a trust is like a company, or a separate legal entity, but that is not the legal position.

Does a Trust Own Property?

A trust does not own property.  The trustee holds property for the trust.

Does the Trustee Own the Property?

The trustee holds property for the trust and as such is the nominal legal owner.  This ownership is qualified by the fact that the trustee holds the property for the purpose of benefitting the beneficiaries. The trustee may be a beneficiary of the trust in which case the trustee is free to benefit him or herself.

How are Trusts Governed?

Most trusts have a written trust deed which set out the rules under which the trust operates.

Can Trust Deeds be Amended?

Trust deeds are usually drafted to enable amendments to be made.  The Courts also have power to vary or revoke a trust.

Are All Trust Deeds the Same?

Although many trust deeds are similar there are often variations.  The reasons for this are that they are drafted by different lawyers; they are drafted at different times when the law was different; or the deed includes tailor made clauses.

Do any laws govern trusts?

In each State there is a Trustees Act, in Western Australia the Trustees Act 1962.  The Trustees Act sets out the rules that apply to trustees and stipulates how trustees can be replaced and when the Courts can make orders relating to a trust.

Wills and Trustees

Discretionary trusts are often used for asset holding purposes.  The trustee of the trust holds the trust assets in his or her name.

The trustee cannot treat the property he holds as his own for the purposes of making his will.  The reason for this is that the property is held by the trustee to benefit the beneficiaries of the trust.  When the trustee dies another trustee takes over the trustee role and becomes responsible for continuing the trust.  By the way, the same applies to superannuation, which is another form of trust.  You can’t just leave your superannuation in your will.

Do trusts last forever?

In Western Australia, the maximum time that a trust can last is 80 years, and then the assets have to be distributed to the beneficiaries.

Can a trustee be a beneficiary of a trust?

Provided that the Trust Deed does not prohibit it, a trustee can also be a beneficiary, the only exception being if the trustee is the only beneficiary of the trust.

Who is Who in a Trust?

Trust deeds contain a reference to a number of different persons and here are some brief definitions.

Trust Deed:                             The trust deed is a list of rules governing the trust.

Settlor:                                    The settlor is the person who initially creates the trust by way of a nominal payment.  For tax reasons the settlor is never named as a beneficiary.

Trustee:                                   The trustee is the person who operates the trust and holds property on behalf of the objects of the trust.

Appointor:                               Most but not all trusts have an appointor.  The appointor is the person who appoints the trustee.

Guardian:                                A Guardian is a person who is entitled to advance notice of certain decisions by a Trustee.

Primary Beneficiary:               A person specifically named in the trust as a beneficiary.

General Beneficiary:               Persons who are entitled to benefit from the trust who are not specifically named in the Trust Deed.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.