Establishing a Trust
Enhancing your long-term financial security requires careful planning. Trusts are a fantastic tool to protect your personal and business assets, while offering substantial tax planning opportunities. The type of trust appropriate to you will depend on a range of different factors. For information, a trust is a structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries). A trust is not a separate legal entity.
The 3 most common types of trusts are discretionary trusts, unit trusts, and hybrid trusts.
Types of trusts
Discretionary trust
A discretionary trust is the most common trust used by small to medium size business owners, investors and medical professionals in Australia. They are generally set up to hold a family?s assets and/or business for the benefit of providing asset protection and tax planning for family members.
From a tax perspective the main advantage is that any income generated by the trust from business activities and investments, including capital gains can be distributed to beneficiaries in low tax brackets to significantly reduce taxes. Assets can also be transferred from generation to generation tax and duty free. In most cases, from an asset protection perspective, assets held in a family trust cannot be attacked by creditors or lawsuits. Other types of discretionary trusts are testamentary trusts, child maintenance trusts, property trusts, special disability trusts and charitable trusts.
Unit trust
Unit trusts’ property (business or investments) are divided into a number of shares called units. The number of units you hold will determine your entitlement to your share of income, capital gains and voting power.
A few advantages of a unit trust are: easy to introduce new equity partners (no value shifting rules), less regulations than a company, when non-related parties are in trust together interests are fixed, 50% discount method for work out CGT is available, the small business concessions can be accessed, asset protection available through correctly drafted trust deed, no regulator, and substantially less onerous rules than those imposed on individuals.
Hybrid trust
A hybrid trust is a mix between a discretionary trust and a unit trust. It takes the best features of a discretionary trust and the best features of a unit trust and combines them together into the one entity to create a powerful and flexible tax planning solution. This means that the trustee has the discretion to distribute benefits to the beneficiaries of the trust who are on low tax rates, as well as have unit holders who are absolutely entitles to a portion of the benefits.
Benefits of a trust
- A trust provides asset protection and limits liability in relation to the business.
- Trusts separate the control of an asset from the owner of the asset and so may be useful for protecting the income or assets of a young person or a family unit.
- Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the distribution of income and capital gains among beneficiaries.
- Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or partnerships.
- Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates.
- Trusts receive a discount on the amount of capital gains tax payable on capital assets held for more than 12 months.
