Many people may think of trust funds as being for the ultra-rich – particularly given news outlets often report on trust funds belonging to wealthy dynasties such as the Murdochs, Rineharts and Trumps.
However, the reality is they are common in Australia; trusts can be useful for even moderately well-to-do individuals as a way of managing their personal, family or business assets, especially when they want to ensure those assets are handled in a way that benefits future generations. There were more than 902,000 trusts in Australia in the 2017-18 financial year, according to the latest trust data from the Australian Taxation Office (ATO) – about one for every 28 people, based on a population of 24.99 million in June 2018. Most of these trusts were operating with under $2 million, based on the ATO’s data.
Older Australians today have substantially greater wealth on average than Australians of the same age from decades earlier, with many having now experienced several decades of compulsory superannuation payments and house price appreciation. At TPT Wealth, we have found that many of our clients want to set up trusts via their will to ensure that their accumulated wealth, supplemented by any life insurance payments, is passed onto younger generations of their family, and sometimes charitable causes, in a controlled way that is designed to provide the most benefit for the recipients.
Included in this article:
What is a trust fund?
Under Australian law, a trust is not a separate legal entity like a person or company, but an estate-planning tool that puts a person or entity in charge of holding an individual’s assets in an account for the benefit of another person or people.
The person or entity charged with managing the trust and distributing the assets is known as the trustee, and those who ultimately receive the assets are known as the beneficiaries. The assets held in a trust can vary, but property, shares and family businesses are all commonly held in trusts.
A trust is set up via a legal document known as a trust deed, which outlines rules like what the purpose of the trust is, how benefits will be paid to beneficiaries, who the trustees are, who the current beneficiaries are and who can become a beneficiary in future.
In Australia, a superannuation fund is a special type of trust, whereby the people or company managing the super fund are trustees charged with looking after the savings of the fund’s members (the beneficiaries) until those members retire or meet another condition of release.
What is a trust fund used for?
There are a variety of reasons why people may create a trust fund, including:
- Providing for family members: A trust fund can be a key structure used by individuals who want to ensure they safely share their assets with their chosen beneficiaries, such as their children or grandchildren, while also maintaining a level of control. This may be useful when the beneficiaries are too young or incapacitated to manage their own finances. By creating a trust, you can set the terms for the way the assets are to be held, gathered or distributed in the future. For example, you could establish an educational trust fund for your grandchild by requiring that the money is only used for school or university fees.
→Related article: Estate Planning Guide
- Protecting assets from creditors or lawsuits: Trusts are also often created to separate a person’s assets from their personal estate. For instance, if you had a family business that fails, and a claim was made against you by creditors, the assets in the trust would not be in your name, but rather in the name of the trustee, and therefore couldn’t be accessed by those creditors.
- Tax purposes: From a tax perspective, the main advantage of holding assets in a trust is that any income generated by those assets – whether a business or investments – can be distributed to beneficiaries at the tax rates that apply to them, which may be at lower marginal rates. For example, if you have a high income and place your assets in a trust, the trustee can make payments to your beneficiaries with a lower income, often children or other family members such as retired parents, who generally pay less tax. However, it’s important to note that higher rates of tax do apply to most trust distributions to minors (those under the age of 18). It may be a good idea to speak to a tax professional to understand what tax advantages or disadvantages may apply to your situation.
Types of trusts
There are several different types of trusts in Australia. Some of these include:
Discretionary family trusts
A discretionary family trust, also known simply as a family trust, is a common type of trust that is used to hold family assets or conduct a family business. This type of trust is set up in a way that allows the trustee to choose how much money the beneficiaries will receive from the trust and when, within the parameters set out in the trust deed. This means that the trustee can distribute income in a tax-effective manner. It also provides the trustee with flexibility to meet the changing or unpredictable needs of recipients, such as the educational or career development costs of a child or grandchild.
Unlike a discretionary trust, where the trustee chooses how to distribute the profits, in a fixed trust, the beneficiaries have fixed entitlements to the income and assets of the trust. The trustee is bound to distribute the trust money to the beneficiaries in a predetermined manner, as set out by the trust deed. If you were to establish a fixed trust for your children, for example, you could specify in the trust deed what proportion of the fund’s capital and income you want to go to each child. A fixed trust can mean less conflict amongst beneficiaries because their proportional entitlement is predetermined and can’t be changed.
Fixed unit trusts
A fixed unit trust is, essentially, the same as a fixed trust. The only difference is that the unit trust shares capital and income among the beneficiaries based on how many units they have in the trust. A unit is a specific piece of property that entitles the unit holder to a specific proportion of the income and capital of the trust, similar to the way shares entitle the owner of a share to a proportion of the capital of the company and its earnings (usually paid by dividends). For example, the trust could be established with 100 units and there may be five beneficiaries who have a fixed entitlement to 20 units each.
A testamentary trust is a trust set up in the event of your death and must be established under the terms of your will. If you were to die while your children were still minors, a testamentary trust would allow for your appointed trustee to protect and manage the assets in your estate until your children are old enough to receive their inheritance and manage their own finances. In the meantime, under the parameters you set in your will, the trustee can release amounts of money from the trust to the beneficiaries as needed for specific expenses, such as education.
Special disability trusts
A special disability trust (SDT) is a way to plan for the long-term care and accommodation needs of someone with a severe disability. The trust can pay for reasonable care (such as case management, therapy, special food, or mobility aids), accommodation and other discretionary needs of the beneficiary during their lifetime. For a special disability trust to be established, the beneficiary must meet the legal definition of ‘severe disability’, which will be assessed by Services Australia. SDTs have tax and other financial benefits when compared to family trusts.
Charitable trusts can be set up to support a variety of charitable organisations. For example. recently TPT Wealth assisted a client whose partner was deceased and who had no children or immediate family to leave her money and assets to after her death. She has made provision in her will for a charitable trust to be set up after she dies. TPT Wealth will act as the trustee, manage the assets, and each year the income from the trust will be paid to the charities she nominated in her will.
Superannuation proceeds trusts
When a person dies, in most cases their superannuation provider pays the person’s remaining super to their nominated beneficiary or their dependents. When a person’s super is paid after their death, it is called a ‘death benefit’. A superannuation proceeds trust (SPT) is a trust that contains only the deceased’s superannuation death benefits.
A major reason for setting up an SPT is to protect the death benefit from third parties who may try to access the capital, such as creditors. For instance, if death benefits are paid directly from your superannuation fund trustee to your spouse, someone your spouse owes money could claim some of the death benefit. If you wish to prevent this, you could make provisions in your will for your death benefit to be paid into an SPT, with your spouse as the beneficiary. This might be appropriate if your spouse is in an occupation with high financial risk. Similarly, if they went through a divorce, placing their share of the death benefit in an SPT would provide protection from their previous spouse.
How to set up a family trust fund
To establish a trust fund, there is a series of steps to typically follow. Below is an example of some of the steps involved in setting up a family trust (one of the most common types of trusts) in Australia:
1. Decide on the trust assets
List all the holdings (such as cash, shares, property, or other investments), to be placed in the trust, along with their holding value.
2. Choose a trustee
Selecting a trustee is an important element in establishing any trust, including a discretionary trust. The trustee will need to manage the trust in accordance with the terms set out in the trust deed. A trustee can be an individual, several individuals or a company. It is a good idea to consider an independent trustee, as conflicts of interest can arise if the trustees of a family trust are related to each other and are beneficiaries of the trust.
3. Determine the beneficiaries
Compile a list of people or entities who you want to be entitled to receive benefits, such as your children or grandchildren. You’ll also need to decide what sort of entitlement you want the beneficiaries to receive – whether it is a percentage, a fixed amount or at the trustee’s discretion.
4. Draft a trust deed
The next step is to engage professional services, such as a lawyer, to create the trust deed – a legal document that sets out the rules that govern your trust fund and the powers of your trustee. According to Daniel Zeeman, partner of law firm Butler McIntyre & Butler, the legal costs of setting up a “usual” family trust can be less than $1,000, but will be greater if you require bespoke trust provisions to be included in the trust deed establishing your trust.
5. Settle the trust
The settlor must sign the trust deed and then give the initial settlement sum (usually $10) to the trustee. The settlor is generally someone unrelated to the beneficiaries of the trust, such as an accountant or close family friend. The settlement sum is representative of the trust’s assets and paying the sum reflects the exchange of these assets to be held by the trustee. While the sum is a token amount, it is an important formal step in establishing the validity of the trust.
6. Sign the trust
After the trust is signed by the settlor, the trustee or trustees must hold a meeting agreeing their appointment as trustee and accepting to be bound by the terms of the trust deed.
7. Pay stamp duty if you need to
Each state has a revenue authority that provides information about if and how much stamp duty must be paid on a trust deed. According to Butler McIntyre & Butler, generally only nominal duty is payable when a trust is first established, based upon a settlement sum of $10. Some states such as Tasmania have abolished Duty on trust deeds. You should consult your legal advisor in the state in which the trust is established as to whether the trust deed incurs stamp duty, or whether it needs to be lodged with the relevant revenue authority when it is set up. Duty is payable when dutiable property (for example real estate), is acquired by the trustee of the trust.
8. Create a name for your trust
You can name your family trust whatever you like, such as using your family name. For example, if your surname is Coleman, you could call the trust the “Coleman Family Trust”. If you are establishing the trust for a specific purpose, you could give it a name appropriate for that purpose, such as the “Coleman Educational Fund” or “Coleman Investment Fund”.
9. Apply for an ABN and TFN
You will need a Tax File Number (TFN), which the trustee uses when lodging tax returns for the trust. If you intend to carry out enterprise or business activities under the trust, such as a family business, then it is likely you will also need to obtain an Australian Business Number (ABN). The trustee registers for the trust’s TFN and ABN in their capacity as trustee.
10. Set up a bank account
The last step in the process is to open a bank account for the trust. It should be opened in the name of the trustee ‘as a trustee for the trust’. The first deposits into the account should be the settlement sum. The trust is now operational and can accept contributions or make investments.
Pros and cons of trust funds
There is a range of possible advantages and disadvantages to setting up a trust fund. Trusts can provide for vulnerable family members, protect wealth for future generations, minimise the risk of a dispute over inheritance and help with tax strategy and planning. However, it is important to consider the costs involved in the setup and administration of trusts, including needing to provide annual tax returns.
You should also make sure you understand the risks involved in setting up trusts. One thing people may not necessarily realise is that not all trusts last forever. While some trusts, such as charitable trusts can be established “in perpetuity”, meaning they will last forever, most other trusts have a limited life under the law. The maximum limit in most Australian states is 80 years from the time the trust is established. If you establish a shorter expiry date on your trust, you can extend the life of your trust if there is still time before it reaches the maximum limit. When the trust’s expiry date is reached, its property must be distributed to beneficiaries. This can have implications, including changing who is entitled to the property and any income from it – effectively bringing to an end the asset protection advantages of your trust. For instance, if the beneficiary of the trust owes people money, those creditors may be able to claim some of the money the beneficiary has received from the trust. It can also possibly trigger capital gains tax and stamp duty liabilities.
Another potential problem is that losses in a trust can’t be distributed among beneficiaries – instead, the loss is trapped in the trust. Take the scenario where the trust purchases an investment property, but the rent isn’t enough to cover the interest and other costs related to the property. To ensure the trust has enough cash to pay expenses, the beneficiaries may need to lend money to the trust.
It is also crucial to avoid any perception that a trust is being used to avoid paying appropriate taxes. In recent years, the ATO has heightened its scrutiny of trusts, establishing a special taskforce to look into non-compliance in existing trust structures. One example of the behaviour that has attracted the ATO’s attention is trusts that direct entitlements to low-tax paying beneficiaries while the benefits are enjoyed by others such as a business owner or partner. For instance, it might raise alarm bells if the money being paid to the beneficiary was finding its way back to the others in the business who were then spending the money on themselves.
While trusts can be relatively simple to set up, it is important that they be done correctly and in the context of a broader financial strategy. Although there is an abundance of information online, it is a good idea to speak with a qualified professional such as a lawyer, accountant, tax advisor or estate planner before setting up a trust of any kind, to help you decide on the best outcome for yourself and your family or business.
If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified above.
Cover Image Source: William Potter (Shutterstock)
About Craig Mowll
Craig Mowll is the General Manager, Wealth at TPT Wealth Limited, which is a subsidiary of MyState Limited. He is responsible for the strategic, financial and ongoing management of the Wealth division at TPT, specialising in asset management and trustee services. Craig was previously Managing Director of Aura Group’s Funds and Wealth Management business, following five years as the Chief Executive Officer of Certitude Global Investments. His prior roles included working at Credit Suisse and St. George Bank. You can find him on LinkedIn.