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