What is a trust?
A trust is an agreement to hold assets “in trust” for others.
How did trusts come about?
Trusts were invented during the Crusades – Englishmen who wanted to go to war would appoint a friend or manager to manage their farms until either they came back or their children became adults.
Before trusts existed, there was no guarantee that the friend or manager would actually pass on the farm to the children.
Key definitions within a trust:
Trustee – The trustee is the person (or company) who is responsible for administering the trust and making decisions for the benefit of the beneficiaries. It is possible for the trustee to also be a beneficiary (which might occur in a family trust) or the trustee might just be a manager (which would occur with a managed fund).
Beneficiary – The beneficiaries are the individuals (or entities) who can benefit from the trust. A beneficiary can be named or part of a class (eg. descendents of Mr Smith).
Trust Deed – This is the document that sets out the rules that govern the operation of the trust. Trusts that were created 20 years ago will have different rules to a trust setup today and this is part of the complexity of trusts.
Appointer – The appointer has the power to change the trustee and is usually the person controlling the trust. It is possible for the appointer to also be the trustee.
Settlor – A settlor is the person who is part of the agreement to set up the trust. The settlor is usually an accountant or lawyer who helped set up the trust and would usually have no further involvement with the trust.
Types of trusts
There are many types of trusts. Two common types are a fixed trust (for example, a managed fund) and a non-fixed trust (also called a discretionary trust). A “family” trust is usually a discretionary trust. To make things even more complicated, there are hybrid trusts – which might contain a fixed portion (such as right to capital) and a non-fixed portion (such as right to income).
Fixed Trust (also called a unit trust or managed fund)
A fixed trust is a trust split into units. XYZ is a managed fund. XYZ is a fixed trust, split into units. Each unit entitles you to a share of the managed fund’s (read: trust’s) income. So if XYZ has 1 million units and you own 10,000 units you would be entitled to 1% of the trust’s income.
During the year you would receive cash distributions of income. After the end of the year (usually around September/October), you receive a tax statement to show what amounts you should put in particular items of your tax return. For example, if the trust sold assets during the year, part of the cash you received might be a capital gain (or loss), rather than a trust distribution.
Discretionary Trust (also called a family trust)
Your uncle might own shares (or run his business) through a discretionary trust. At the end of the year the trustee (either your uncle or a company that he controls) decides how to split the income. While previously this could be done by amounts (eg. your uncle might resolve to give $500 to each child, $10,000 to himself and the balance of money to his wife), recent law has prescribed it be done by percentage (eg. 1% to each of two children, 5% to himself and 93% to his wife).
Other information about trusts –
Is a trust a separate entity like a company?
A company is a separate entity and is treated in the eyes of the law as a ‘person’. A company can sue and be sued and can have assets in its own right.
However, a trust is not a separate entity (like a company). A trust is more like an agreement. Any assets owned by the trust are actually owned by the trustee (however these assets are owned for the benefit of the trust).
Is one family trust the same as another?
No – each trust is different. The complicated thing about trusts is that each trust takes its rules from the trust deed, so every trust might be similar but will actually have different rules in the trust deed.