Like most items surrounding tax and legal structures the setups, trusts can complicated, and misunderstood.
I strongly recommend legal, tax and accounting advice when it comes to creating the trust that is right for you and your circumstances.
The first thing you need to remember is that a Trust is NOT a separate legal entity (unlike, say, a Pty Ltd Company). And a Trust isn’t YOU either (e.g. unlike a Sole Trader orPartnership structure).
Basically, a trust is a LEGAL RELATIONSHIP between one person and another person (or persons). The first person is called “the Trustee”, while the second person is called “the Beneficiary” (or “Beneficiaries” if there are more than one). The Trust is set up by a person called “the Settlor”.
Don’t you just love legal terms!
So, the TRUSTEE holds and deals with property (eg. this could be assets, income, etc) in a certain way for the benefit of the BENEFICIARIES. Think of the Trustee as a “middleman” in this equation.
The benefits and pitfalls of trusts – a very simplified version
ADVANTAGES OF A TRUST
Generally speaking (and without looking at any SPECIFIC types of Trust), the advantages tend to be:
- flexibility of asset and income distribution
- asset protection
- easier to transfer assets
- can safeguard certain social security payments for Beneficiaries (did someone say “Trust fund babies”…?)
- reduced liability (especially if the Trustee is a body corporate)
- Trustee retains control of management and assets
- great benefits for family (if they are involved in the Trust – e.g. family businesses)
- ability to pass wealth from one generation to another
- taxation (facilitates income-splitting, and other tax minimisation strategies)
DISADVANTAGES OF A TRUST
Not surprisingly, there are also many disadvantages in using a Trust for your business structure:
- expensive to set up and run (you REALLY should use a lawyer, accountant, etc)
- complicated / complex legal structure
- difficult to make changes to the structure once set up
- compliance and running costs
- can be difficult to close down
- lots of paperwork
- lots of regulations and laws to adhere to
- can’t hold onto profits to “grow” the business, as these will incur penalty tax rates
- can’t distribute losses, only profits
- limited life of Trust Deed
- inflexibility since powers restricted by Trust Deed and the law
There is a lot written on this subject, but this is a great article
So trusts can be a great vehicle for asset protection and income and asset distribution. They do come with complication, so as I have mentioned don’t just read a few lines and decide this is right for you.
Get the right legal, tax and accounting advice before proceeding.