Trusts are a common way of organising and dealing with finances within and between families, businesses, corporations and even governments. When it comes to investments, planning, and transferring wealth, a trust serves a critical role in ensuring that the parties recognised by the trust are able to receive, send and generate wealth based on the specific terms of the trust deed.
In this blog, we take a closer look at 8 different types of trusts in Australia, what purpose they serve and why you should choose one over the other.
What is a trust?
There are many misunderstandings around trusts. Some may think that a trust is a business, person, or entity operating in the background. These assumptions are incorrect – and also misleading.
A trust is essentially a legal agreement established to formally recognise a certain relationship between legal or natural persons – like individuals or companies – and in many cases, it involves a mixture of the latter.
The idea of a trust isn’t universal – and derives from the English legal tradition where courts began to recognise not only a natural legal person and his or her property but also the rights of legal persons who may benefit from the property being held by designated “trustees”.
Therefore a trust, put very simply can be described as a formal legal relationship where legal entity A holds property for the benefit of legal entity B. The trustee, (A in our example) who holds the property can be a company, an individual or even a group of individuals.
How are trusts organised?
Trusts can be organised in a variety of different ways – with different trust structures creating different kinds of rights and obligations for either of the parties involved. However, underlying any trust is the ability of courts to enforce the trustees’ obligation to ensure that the property being held is for the beneficiary’s benefit. This means that should a trustee breach their obligations under the trust deed, the beneficiary or beneficiaries may have legal recourse in the courts to ensure their rights created under the deed are met.
Types of trusts Australia
There are many different types of trusts out there, and it can be confusing to know which one is right for you. At the end of the day, trusts are unique depending on who is involved and why. With that in mind, here are eight of the most common trusts operating in Australia.
1. Fixed trusts
Arguably one of the most common types of trusts Australia has are fixed trusts. These involve the automatic and fixed transfer of property to the designated beneficiaries of the trust. This means that the trustee has no discretion when it comes to dispensing with the fixed income – on behalf of and to the beneficiary.
2. Unit trusts
Unit trusts are types of fixed trusts, where beneficiaries of the trust hold units of the trust – similar to how shareholders own shares of a company. Instead of shareholders, beneficiaries are called unitholders and are typical of property investment trusts or joint ventures where units can be bought and sold by the respective various beneficiaries.
3. Testamentary trusts
Testamentary trusts are trusts that are created when the testator (the person who set up the trust) dies. This usually means that the testator dictates the terms of the trust – and on what conditions the income may be released to the beneficiary or beneficiaries – in their Will. This could involve a minimum age upon which the trust may be accessed.
Testamentary trusts are closely linked with Wills and Estates and can be challenged by a potential beneficiary, or the beneficiary themselves. Usually, this would mean that a family member would contest a Will, and apply to have the terms of the trust amended.
4. Discretionary trusts (Family trusts)
This type of trust is one of the most common in Australia and is probably the type of trust that most people will come into contact with, as they are often used by families where the trustee decides voluntarily to establish a trust for the benefit of another family member – and for tax planning purposes. They are also very commonly used in family run businesses, so that the income of the business can be distributed evenly between various family members.
Discretionary family trusts can also be set up as a special disability trust – intended for a family member living with a disability.
While they’re commonly known as family trusts, they don’t necessarily have to involve family members. Discretionary trusts are set up for a variety of reasons, including to maximise control over the assets, allowing the trustee to retain almost complete control over how assets are distributed. They are called ‘discretionary’ because unlike a fixed or unit trust, the Trustee has total discretion in deciding how to distribute the income and assets of the trust – no one beneficiary has any fixed entitlement to the income or assets of the trust, until the Trustee makes such a determination.
5. Hybrid trusts
Hybrid trusts involve elements of both fixed and discretionary trusts – meaning that the trustee has a given amount of rights over the allocation of or positioning of various assets under the trust, while also conceding certain rights to beneficiaries – like issuing regular entitlements in the form of special units.
6. Charitable trusts
As the name implies, charitable trusts involve the establishment of a trust which is tasked with managing the relationship between the trustee and the beneficiary which is usually a philanthropic organisation, or group of organisations that fulfil a charitable goal – while also allowing the trustee to take advantage of tax concessions.
7. Superannuation trusts
If you didn’t know already, all superannuation within Australia is managed via trusts. The trust deed establishes the terms of the superannuation trust and ensures that once retirement age is reached, the trust beneficiaries gain access to their trust income. Wills and Estates lawyers are particularly interested with superannuation trusts, your superannuation and death benefits should always form part of your estate plan, even though your interest in the superannuation trust does not necessarily form part of your estate.
8. Bare trusts
Bare trusts involve one trustee and a single legally competent beneficiary which may dictate the terms of the trust deed. In bare trusts, beneficiaries retain complete control over the trustee and are common where the beneficiary wants to remain anonymous by using a so-called shareholder nominee as their proxy.
Choose the right trust for you
Making the decision about which trust is right for you depends entirely on your financial goals. Whether you’re a beneficiary, a trustee, or interested in setting up a trust for your family, ensuring your assets work for you and your family is essential. To get the legal guidance you need, contact our qualified team at Solomon Hollett Lawyers. Call us on (08) 6244 0985 or book a free 15 minute consultation on our website.