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What is a trust?
Trusts are often used in connection with running a small business. A trust is not a separate legal entity in the same way that a company is. In simple terms it is a business structure where a trustee (usually a company) carries out the business on behalf of the members of the trust. A trust is set up through a trust deed.
Types of trust
There is a range of trusts including:
- discretionary trusts - where the trustee has a discretion when distributing funds to the beneficiaries. The most common example is the family trust;
- unit trust - were unit holders have a number of units in the trust. Distribution from the trust is on the basis of the number of units held.
- hybrid trust - this is a combination between a unit trust and a discretionary trust.
The lingo
Appointor - this is the person who has power under the trust deed to remove the trustee and appoint another trustee.
Beneficiaries - these are the people (can include a company) who are entitled to distributions from the trust.
Settlor - this is a person (who is unrelated to the beneficiary or trustee) who provides an amount of money (eg $10) to establish the trust.
Trustee - this is usually a company (it can be a person) which owns the assets of the trust, not in its own right, but as trustee of the trust. The trustee is responsible for the financial "health" of the trust and makes decisions about distributing income, borrowing money etc
The pros and cons
Advantages of a trust include:
- There may be taxation advantages - although this depends on current tax laws;
- Allows for income streaming;
- Limited liability etc.
- It can provide asset protection advantages.
The disadvantages of a trust include:
- Possible implication for capital gains tax;
- Distribution of tax losses;
- Establishment costs (although these days this can be minimal by using a pro forma trust deed, but get professional advice first) and administration costs etc.
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