What is a trust?

The trust operates under a written trust deed that sets out the trustee's powers, the classes of beneficiaries, distribution rules and the trust period. A settlor establishes the trust with a nominal asset and usually has no ongoing role. The trustee, one or more individuals or a company, holds legal title, controls the trust property and can invest, lend, buy and sell assets and enter finance agreements, but only for proper trust purposes. Many discretionary trusts also have an appointor with the power to appoint or remove trustees.

Beneficiaries hold equitable interests and can ask for information and accounts, though discretionary beneficiaries usually cannot force a distribution. Trust property can be anything of value: cash, real estate, shares, plant and equipment. Because a trust holds legal title separately from those who benefit, it is widely used for asset protection, income distribution flexibility and estate planning.

A discretionary trust, often called a family trust, gives the trustee discretion over who receives income or capital, with beneficiaries usually listed as a class of family members. It is typically used to protect a family business's assets and for income-splitting and tax planning. A unit trust gives unit holders fixed units, much like shareholders, with income and capital distributed according to unit holdings; it suits joint ventures, property syndicates and managed funds where entitlements must be clear.

A fixed trust gives beneficiaries specified entitlements, which reduces disputes but limits flexibility. A hybrid trust combines discretionary and fixed features for complex commercial arrangements. A testamentary trust is created under a will and takes effect when the estate is administered, protecting assets and planning tax for beneficiaries after a death. A charitable trust serves charitable purposes under its own regulatory rules and tax concessions.

A trust needs a TFN and, if it carries on an enterprise, an ABN, plus GST registration once turnover passes the threshold and PAYG withholding if it employs staff. Each year the trustee works out the trust's income and must make and record a resolution allocating it to beneficiaries by 30 June, or any earlier date the deed requires. A beneficiary who is not presently entitled at year end cannot be made so later, and the trustee is taxed on that income at the top rate.

Beneficiaries then include their share on their own returns, and income the trust retains may be taxed in the trustee's hands at higher rates. Trusts are subject to capital gains tax, and streaming capital gains or franked distributions must follow ATO rules: a specific entitlement to a franked distribution has to be recorded by 30 June, while for a capital gain it can be recorded up to two months later. Poorly documented resolutions cause disputes with the ATO and between beneficiaries.

Trustees owe fiduciary duties: follow the deed, act with care and skill, act in the beneficiaries' best interests, avoid conflicts, keep proper records and act impartially. A trustee is personally liable for debts it incurs as trustee and relies on a right of indemnity out of the trust assets to meet that liability, which is why corporate trustees and clauses limiting recourse to trust assets are common.

Trusts often take on loans and leases for business assets. When a trust borrows, the loan documents should be signed by the trustee in its trustee capacity and within the deed's powers, and lenders may require personal guarantees. Keep separate bank accounts and asset registers so trust and personal assets never mix.