Trusts FAQs

Q. My accountant wants me to set up a family trust.  Should I do so?

A. Basically this depends on your individual circumstances and you always need to be mindful of your tax liability and those who are beneficiaries under the Trust.

Q. I have an old family trust which owns property that I want to give to family members.  What is the best thing for me to do?

A. This depends on the age of those family members and whether you wish to transfer control of the trust to someone else?  A lawyer can assist you to do this on the most economical basis.

Q. What is a trust?

A. When a person receives any money or property on behalf of another person, this creates a trust. The relationship between the person receiving the money or property, and the person for whose benefit it is held is described as a trust. A trust allows you to own nothing but control everything.

Q. What makes up a trust?

A. A trust is made up of the following elements: -

• the settlor - the person who provides the trust property (which could be any asset) and creates the trust, they are specifically forbidden from benefiting from the trust;
• the trustee - the person (often a company) who becomes the legal owner of the trust property and who manages it in accordance with the settlor's intentions for the exclusive benefit of the beneficiaries;
• the trust deed - a document drawn up to show the way in which the trust is to be managed and the manner in which income is distributed;
• the appointor - This is the most powerful person in the trust structure as this is the person(s) who, under the trust deed, can replace the trustee; and
• the beneficiaries - the person(s) for whom the trust was created and to whom the trustee distributes the income and eventually the assets. 

Q. What types of trusts are there?

A. The range of trusts can be broadly divided into 3 types: -

• discretionary trusts - where the trustee has a discretion when distributing funds to the beneficiaries.
• unit trust - were unit holders have a number of units in the trust. Distribution from the trust is on the basis of the number of units held.
• hybrid trust - this is a combination between a unit trust and a discretionary trust.

Q. What are trusts used for?

A.  Trusts are often used in connection with running a small business. They are a vehicle used to hold property in the name of the trustee for the benefit of others as permitted by law. A trust is set up through a trust deed.

Q. Are trusts legal entities?

A. A trust is not a separate legal entity in the same way that a company is. In simple terms it is a business structure where a trustee (usually a company) carries out the object of the trust on behalf of the members of the trust. A trust not being a legal entity cannot contract in its own right.

Q. How does the trust operate?

A.  A trustee is appointed under the trust deed. A trustee is frequently an incorporated body (a company), or natural person. The trustee must direct the affairs of the trust according to the trust deed otherwise he will become personally liable for any or all resulting shortfalls.

Q. What is a discretionary trust?

A. This trust vehicle is used to provide the maximum flexibility for distribution of income. Frequently, family members are beneficiaries. The trust deed will give the trustee the discretion to divide the income and assets of the trust between the beneficiaries, who are generally the members of the family, other related persons and companies.

Q. What is a unit trust?

A. Unit trusts are trusts where the holders of the units of the trust receive income based upon a specific distribution of capital or income according to the number of units of the trust they hold. In a unit trust the entitlement to income and assets is determined according to the number of units each beneficiary holds in the trust. This is a much more rigid structure than a discretionary trust. The trustee has no discretion over the distribution of income and capital to the unit holders. The money or property is held upon trust absolutely for the persons who for the time being are the holders of the units in the unit trust. Units in a unit trust can be redeemed more easily than reducing capital in a company.

Q. What are the advantages of a trust?

A. There may be taxation advantages - although this depends on current tax laws. A trust allows for income streaming, limitation of liability and can also provide asset protection advantages.

Q. What are the disadvantages of a trust?

A. There are possible implications for capital gains tax and the distribution of tax losses. Further there is also the establishment cost of the trust itself.

Q. What is a trust deed?

A. A trust deed is a document signed by the trustee, in which the trustee agrees as to how the trustee will deal with the trust fund. The trust deed is, in effect, the constitution of the trust.

Q. What is a trust fund?

A. The money or assets which are transferred to the trustee form the trust fund. Those assets, together, are referred to as "the trust fund". The assets which form part of the trust fund are often income producing assets, such as shares or a business. The income which these assets generate are often added to and form part of the trust assets.