If you are looking to set up your family with your assets for the future, you may consider opting to set up a trust fund as opposed to a standard will.
Trust funds are a private legal arrangement where the ownership of one's assets remains in an account that is managed by an individual or group of individuals, for the benefit of others.
What is a trust fund?
As the name suggests, a trust fund is a fund used to place assets into an account to be held by another person. The intention of a trust fund is to benefit other people, as opposed to the person who establishes the fund.
Trust funds will typically contain assets such as stocks, bonds, cash, antiques and even real estate.
Super and self-managed super funds, or SMSFs, are also popular examples of trusts in action, providing members benefits in retirement through investments. Trustees, whether individuals or companies, oversee the fund’s assets on behalf of its members, holding and managing the savings until retirement or another qualifying event.
How does a trust fund work?
Generally speaking, instead of going from the owner to a beneficiary as is the case with a will, assets go from the owner to the trust fund and are then passed on the the necessary beneficiaries in due course. There are a number of parties required to set up a trust fund. These include:
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Settlors: The person or people who establish the trust.
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Trustees: The person or people who manage the trust fund and eventually distribute its assets.
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Beneficiaries: The person or people who receive the assets from the trust.
Key uses of trusts
Trusts are versatile legal arrangements that serve a range of purposes including:
Protecting assets
Trusts can shield assets from potential risks such as creditor claims or legal disputes. By placing property or investments into a trust, the legal ownership is separated from personal ownership, which can help safeguard wealth for beneficiaries.
Tax planning
Trusts are often used as part of strategic tax planning, particularly for families. By distributing income or capital gains among beneficiaries in a structured way, trusts can help optimise tax outcomes while ensuring compliance with tax laws.
Supporting family members
Trusts provide a structured way to care for children, elderly relatives, or individuals with limited decision-making capacity. They ensure that assets are managed and distributed responsibly over time, according to the intentions of the person who set up the trust.
Business management
Family-owned businesses can be operated or passed on through trusts. This structure allows for continuity of management, clearer succession planning, and potential protection of business assets from personal liabilities.
Types of trust funds in Australia
In Australia, there are five different types of trust funds recognised, all of which are outlined below. It's important to recognise the differences between each type of trust fund and establish the one relevant to your assets and future ambitions.
1. Family trust funds
Family trusts or discretionary trust funds are the most common types of trusts in Australia. These trusts provide trustees with the discretion to decide who receives distributions and how often payouts occur. Family trusts are accepted in every Australian state and are considered to be relatively easy to establish and operate.
2. Fixed trust funds
A fixed trust or unit trust fund removes the option to determine precisely when assets are distributed. Instead, assets are split into units, and unit holders are given their distribution at the end of each year. This trust is established for unrelated parties that hold an asset together, such as a large property, shares or business. A unit trust is where the rights of the beneficiaries to income and capital are fixed.
3. Testimony trust funds
A testimony trust fund is set up following the death of an individual, under the guidance of the terms of their will. These are often used in cases of parents dying while their children are still too young to manage finances. According to the will, and actioned by the trustee, assets may be released to assist with education, but the assets will not be fully released until the beneficiaries become legal adults.
4. Special disability trust funds
A special disability trust is a specialised trust, utilised to help cover the costs of care for someone with a severe disability. These trusts must be verified by Services Australia before they come into effect.
5. Charitable trust funds
Charitable trusts distribute assets to elected charities every year until they are depleted.
6. Self-managed superannuation funds (SMSFs)
In Australia, SMSFs are a specialised type of trust used to manage retirement savings. Trustees of an SMSF have legal responsibilities to invest and administer the fund for the benefit of its members, offering greater control over investment decisions compared to standard superannuation funds.
If you’re looking to invest in property through your SMSF, consider the range of SMSF loans in the comparison table below.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.24% p.a. | 6.26% p.a. | $3,075 | Principal & Interest | Variable | $0 | $230 | 70% |
| Promoted | Disclosure | ||||||||||
6.49% p.a. | 6.54% p.a. | $3,157 | Principal & Interest | Variable | $0 | $220 | 70% | Disclosure | ||||||||||||
6.74% p.a. | 6.76% p.a. | $3,240 | Principal & Interest | Variable | $0 | $230 | 80% |
| Promoted | Disclosure |
Advantages and disadvantages of trust funds
Advantages
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Privacy: Trust funds provide more privacy than creating an entirely separate company.
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Flexibility: Trust funds provide flexibility in distribution amount and frequency among beneficiaries.
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Tax: Trust income is generally taxed as income of an individual.
Disadvantages
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Complex structure: The structure and steps involved with creating a trust fund is generally more complex than creating a business or leaving assets for beneficiaries via a will.
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Costly to maintain: A trust fund can be more expensive to establish and maintain.
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Liability: Trustees can be personally liable for the assets of the trust.
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Assets bound to a trust deed: When or if you sell your assets into a trust, you no longer own them. Instead, they are then bound by the context of the trust deed.
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Tax problems: When improperly structured, a trust fund could unintentionally lead to missed tax obligations, potentially resulting in significant penalties
How to set up a trust fund
In order to set up a trust fund, InfoChoice recommends consulting a solicitor or financial adviser to guide you through the process and ensure all necessary steps are completed to secure your assets for the future. Here are some of the steps required when setting up a trust fund:
1. Determine trust fund assets
Decide upon the assets you would like to place in your fund, ensuring the values of each specific asset are listed.
2. Select a trustee or multiple trustees
Appointing a trustee will determine who manages the legal operations and contents of the trust fund.
3. Choose your beneficiaries
Determine who will receive the assets allocated within your trust fund. This includes the amount each beneficiary will receive either as a dollar figure or a percentage.
4. Create a trust deed
To set up a trust fund in Australia, all trusts require a legal document known as a trust deed. This legal document will typically outline:
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The purpose of the trust.
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The trustees.
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The beneficiaries.
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The benefits that will be paid to beneficiaries.
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Those who can become a beneficiary in future.
Having created a trust, you, being the settlor, must sign the trust to create the trust deed. Those who are listed as a trustee must also sign the trust.
5. Stamp duty
Stamp duty may be payable on the trust deed, depending on the state or territory. Stamping can be arranged directly through the relevant revenue authority, solicitors or accountants.
6. Register as a business
When forming a trust, you will be required to provide an Australian Business Number (ABN), Tax File Number (TFN), and a business name for the trust. Engaging your solicitor can help you through this process.
7. Open a bank account
Once established, a trust fund bank account should be opened in the name of the trustee or trustees.
