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Are Trusts a good idea or just way too complicated?

A trust is a way of controlling and protecting assets. There is a legal relationship between the trustee (who administers the trust) and the beneficiary (the person who receive the money or assets). The Trustee has a legal obligation to look after the trust, this can often mean investing or using the money wisely with the beneficiary’s interests in mind.

The person who sets up the trust is called the settlor. This person is usually unrelated to the party or family and will not be a beneficiary to the trust. If a trust is established through a Will the settlor is called the testator. The terms and conditions of the trust are set on in a Trust Deed. This is a legal document which specifies;

  • Who the Trustee is
  • Who are the beneficiaries.
  • When and how the beneficiaries are to receive benefits from the trust.
  • What the trustee must consider in administering the trust
  • Any other obligations or powers the trustee may have.

If a trust is to benefit a person with a severe disability this person is called the principal beneficiary. In these circumstances other beneficiaries to the trust are called residuary beneficiaries.

A trust deed may also name an appointor. An appointor is someone who is independent from the trustee and has the ability to make changes to the terms of the trust including to appoint new trustees or beneficiaries. In most cases the appointor will be a close relative of the principal beneficiary.

The property which the trust consists of is called the capital. From there the trust can earn an income i.e. though rent, interest, dividends etc.

A discretionary trust is a trust which gives the trustee power to decide who receives a benefit from the trust and to what extent. In a discretionary trust a trustee must consider all the possible beneficiaries but has no obligation to the then distribute benefits to all beneficiaries.

A testamentary trust is a trust set up under a Will. When a person creates a will they are called the testator. At the time of death any property owned by the testator is known as their estate. Their will then appoints an executor to administer the estate when the testator dies. If a trust is created under the will, a trustee will also be appointed. This person may be the same person or different person to the executor. The trustee has an obligation to act in the best interests of the trust’s beneficiaries.

The Trustee has the obligations and duties to do the following;

  • To implement and manage the trust in accordance with the deed
  • To manage the trust with the beneficiaries in mind. This includes spending, investing and otherwise using trust property to the benefit of the beneficiaries.
  • To avoid unnecessary waste or expense of trust property
  • To seek professional advice regarding the management of the trust.
  • To keep accurate and professional accounts of the trust’s assets and liabilities, income and expenditure and make it available to the beneficiaries if necessary.

The trustees also have rights attached to the management of the trust;

  • To have reasonable trust-related expenses paid from by the trust
  • If they are in doubt of their entitlements to the trust they are able to the apply to the Supreme Court for advice and directions. This can especially apply in cases where there has been a breach of the trust or another abnormality has arisen.
  • To gain compensation for the work they do from the trust. In many cases the deed will specify the form and sum of compensation to be paid to the trustee.
  • If they can no longer continue their responsibilities as trustee, to appoint additional or replacement trustees.

The Trustee Act 1925 (ACT) outlines the various rights and obligations of trustees.

I’m a beneficiary what are my rights?

The trustee has an obligation to the beneficiaries to administer the trust in accordance with the deed. The beneficiaries have the right to express their wishes and ask the trustee for assistance, but they cannot compel the trustee to make certain actions unless the deed allows it. The beneficiaries have the right to ask for an account of the trustee but are limited in questioning the reasons why a particular decision has been made by the trustee. If the beneficiaries believe that the trust has been mismanaged an application to the court can be made.

At the end of the day beneficiaries can expect to benefit from the trust. However it is important how the trustee will manage the trust in both the long term and short term.

Are Trusts taxed?

For tax purposes a trust is treated as a separate legal entity and as such has its own tax responsibilities. Trustees have an obligation to submit tax returns and pay tax just as a normal person would. Trusts are no entitled to the tax-free threshold and higher rates of tax may be applied. The trustee has the power to pay tax from the trust’s assets. It is important that you seek professional advice regarding your trust’s tax responsibilities as both the trust and the beneficiaries can be liable to pay tax.

How much does it cost to manage a trust?

Like any business there are costs involved in managing a trust. These include initial start-up costs, ongoing accountant costs and ongoing legal costs. These are ongoing costs and something that you should talk to a solicitor and accountant about prior to setting up a trust. There has to be enough capital to both establish the trust and then continue to maintain the trust in a way that will benefit the beneficiaries.