Trust Deeds - What You Need to Know
Trusts are a popular structure used by many investors and small businesses. A self-managed superannuation fund (SMSF) is actually a type of trust, as are testamentary trusts that are established as part of a person’s will. But what exactly is a trust? How do various types of trusts operate, and what role does a trust deed play? Let's delve into the intricacies of trusts and explore the various types of trusts including bare trusts, SMSFs and testamentary trusts.
What is a Trust?
A trust, at its core, represents a legal arrangement whereby a specified person or entity (the trustee) holds assets in trust for the benefit of others. Unlike a company, a trust is not a separate legal entity. In fact, a trust is nothing more than a relationship at law between various parties.
What is a Trust Deed?
The terms of the trust are contained in a legal document called the trust deed. The trust deed serves as the compass guiding the trust’s operations, naming all the relevant parties and setting out the terms, conditions and rules for the trust to operate. The trust deed typically includes:
Who and how beneficiaries will receive income and/or capital from the trust.
The trustee’s duty to provide information to beneficiaries including the keeping of proper accounts.
Restrictions on the way in which trust assets are used, invested, mortgaged etc.
How and when the trust deed can be amended.
The ultimate end-date of the trust.
Understanding the Parties to a Trust
There are many parties to a trust with varying roles and responsibilities.
1. SETTLOR
The individual responsible for establishing the trust is referred to as the settlor. Typically, a settlor remains independent of the trust's beneficiaries. Often, a professional advisor, such as an accountant or lawyer assumes this role. Once the trust is set up, the settlor's involvement concludes.
2. TRUSTEE(S)
The trustee (or trustees as the case may be) has the legal obligation of managing and administering trust assets for the beneficiaries' best interests. This task involves a deep understanding of the trustee’s powers under the trust deed. The trustee is entrusted with proper financial record keeping, tax return filing, and adherence to fiduciary responsibilities. Whilst an individual may be trustee, it is recommended for a company to act as trustee to assist in minimising the risk of personal liability (which is usually greater for an individual trustee than it is for a corporate trustee). A corporate trustee is also recommended to minimise risks associated with the death or incapacity of an individual trustee.
3. BENEFICIARIES
The trust is created and maintained for the benefit of its beneficiaries. Beneficiaries can be individuals, companies, trusts and even charitable organisations. Beneficiaries may be specifically named within the trust deed or referred to more generally based on their relationship with the named beneficiaries. This flexibility allows for the inclusion of current or future individuals and entities tied to the beneficiaries.
4. APPOINTOR
The appointor plays the important role of hiring (and sometimes firing) the trustee. Although the appointor does not have day to day control of the trust like the trustee, the appointor in some ways has ultimate control by way of its power to hire and fire.
Explore Specialised Trusts
There are a number of types of trusts that serve a very specific purpose. These include bare trusts, SMSFs and testamentary trusts.
1. BARE TRUST
This straightforward trust involves a trustee who simply holds property of and on behalf of the beneficiary as a mere nominee. The trustee has no discretion and no active duties other than to transfer the property to the beneficiary when required. A bare trust is often used when investing on behalf of a child.
2. SMSF
A Self-Managed Superannuation Funds (SMSF) is a type of trust that operates with the objective of managing retirement savings. The SMSF trust deed outlines how the super fund will be set up and how it will operate, including how retirement savings will be invested. All SMSF trust deeds must be established with a trust deed that complies with Australian superannuation legislation.
3. TESTAMENTARY TRUSTS
A testamentary trust is a type of trust established in a Will that comes into effect upon the death of the will-maker. A testamentary trust allows the trustee (or trustees) to decide, from time to time, which of the nominated beneficiaries may receive the benefit of the trust for any given period. A testamentary trust is commonly used to provide benefits to children and/or grandchildren of the deceased without the risks of transferring those underlying assets directly to those children and/or grandchildren until some later point in time (e.g. upon them becoming adults or reaching a particular milestone).
If you need further assistance in understanding any current structures you may have or that you wish to implement, please don’t hesitate to contact us.