What Is A Trust?

A trust is a relationship where an individual or company (the trustee) carries on a business for the benefit of other people (the beneficiaries).  A common use of a Trust structure is where a trustee carries on a business for the benefit of a particular family and distributes annual profits to them.

It is important to note that a trust is not a separate legal entity.  Two common types of trust are:

  • Discretionary trust – the trustee decides how profit will be distributed among beneficiaries.
  • Fixed trust – benefits are allocated to certain people in predetermined proportions. 

What are the Advantages of a Trust?

  • A trust provides asset protection and limits liability in relation to the business
  • Trusts are very flexible for tax purposes.  A discretionary trust provides flexibility in the distribution of income and capital gains among beneficiaries.  This is often beneficial to allow a company to direct income to a beneficiary that is in a lower marginal tax bracket
  • Beneficiaries of a trust are generally not liable for trust debts, unlike sole traders or partnerships.

So what are the Disadvantages of a Trust?

  • Establishing a trust costs significantly more than establishing sole traders and partnerships.
  • The trustee has a strict obligation to hold and manage the property for the exclusive benefit of the beneficiaries, per the conditions outlined in the trust deed.
  • Losses derived in a trust are not distributable and cannot be offset by beneficiaries against other income they may have.
  • Unlike a company a trust cannot retain profits for expansion without being subject to penalty rates of tax.

A trust is a complex legal structure that must be set-up by an Accountant or Solicitor.  After completing a comprehensive assessment of your circumstances, a Financial Advisor may recommend the establishment of a Trust for Asset Protection or Income distribution purposes.

Source: https://www.business.qld.gov.au/starting-business/types-legal-structures/business-structures/trust

This website contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.