What is a Trust?

A trust exists where a person owns property or legal rights on behalf of another person. A person includes one person, many people, a company or another legal entity. The person holding the company or rights is called the trustee while the person for whom property or rights are held in trust is called a beneficiary.

A trust cannot exist where the trustee and beneficiary are identical. In simple terms you cannot hold property on trust for yourself, however you can hold trust for yourself and another.

A trustee holds duties to a beneficiary described as fiduciary duties. Put simply the concept of fiduciary duties mean that the trustee must act in the best interests of the beneficiary. Some examples of fiduciary duties are protecting and preserving trust property, complying with the terms of any trust deed, keeping accurate trust records and providing financial reports to beneficiaries.

The law does not recognise a trust as a separate entity and any trust property is owned by the trustee. Trusts and trust properties have existed for many hundreds of years. Indeed, the extent of the property that a trust may hold was defined as early 1783 in the case of Head v Lord Tenyham (ER).

Similarly the trust cannot have any debts. Any trust debts are debts of the trustee. Generally a trustee will be indemnified for any such debts by a clause in the trust deed.

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Types of Trusts

In broad terms there are two types of trusts, express and non-express trusts. Express trusts are always formed by a written document which is generally a deed. Conversely, non-express trusts do not have a written document or deed and are formed by operation of the law. There are two types of non-express trusts which are resulting and constructive.

Trust Deed

Express trusts require a written document which is usually a trust deed. The trust lawyers at Brander Smith McKnight are highly experienced in meticulously drafting trust deeds. A trust deed sets out:

1. The objectives of the trust fund
2. The beneficiaries of the trust
3. The trustee and appointer of the trust
4. The method of distribution of trust income and assets

There are four parties involved in any trust deed:

1. The settlor, who sets up the trust and is usually a lawyer. The settlor cannot be a beneficiary and has no further involvement.
2. The trustee, who is the legal owner of the trust property and must act in accordance with the trust deed and in the best interests of the beneficiaries.
3. The appointer, who has the power to appoint and remove trustees in accordance with the trust deed. This usually happens when a trustee passes away or can no longer manage the trust.
4. The beneficiaries, who are the people who benefit from the income and assets of the trust. The beneficiaries do not have ownership of the trust assets.

How long does a Trust last?

The term of a trust will be as nominated in the trust deed but cannot be longer than 80 years, this is set out in the Perpetuities Act 1984 (NSW). The end date of a trust is also known as the vesting date and is the point at which beneficiaries become absolutely entitled to the trust’s assets. At the end of the trust the trustee must distribute the property to the beneficiaries.

Types of Express Trust

The most useful kinds of trusts are trusts that are established intentionally by the parties and are usually documented in a trust deed. Examples are discretionary trusts, family trusts (which are a type of discretionary trust), unit trusts and testamentary trusts.

Discretionary Trusts

These are set up using a trust deed and comply with the requirements of a trust, that is there must be a trustee, a beneficiary and trust property. As the name suggests a discretionary trust allows the trustee to distribute money or other trust property to beneficiaries at the discretion of the trustee. This includes varying the amount to be distributed and selecting the beneficiaries to receive any distribution.

Family Trusts 

Family trusts are an example of discretionary trusts. These are used by families to hold family assets such as property or a family business. The beneficiaries of the trust will be the family members.

Advantages of Discretionary, (including Family) Trusts

1. Asset protection, discretionary trust provides asset protection because a person may hold onto their assets without a specific apportionment or legal entitlement to income, profits, shares or interests to the trust assets. This means that a creditor will generally have no legal access to any assets or funds held by the trust.
2. Tax advantages, a discretionary trust may offer tax advantages because generally these trusts don’t pay income tax. Rather, the beneficiaries pay tax on their share of the trust’s nett income.
3. Beneficiary Income, a discretionary trust can be used to distribute income to beneficiaries at the discretion of the trustee to meet a number of objectives including tax minimisation through for instance income splitting.

Disadvantages of Discretionary, (including Family) Trusts

1. Expenses involved in setting up the trust fund and preparing tax returns.
2. Liability of trustees, while trusts offer excellent protection for the beneficiaries, the trustee is personally liable for any trust debts incurred. These may be managed by providing an indemnity in the trust deed and using a company as the trustee.

Unit Trusts

A unit trust is a trust that is often used to pool funds for investments, such as property investment and development. They are sometimes used by superannuation funds. Each beneficiary in a unit trust must hold a certain number of units and the ownership of the trust property and the distribution of trust income is fixed in accordance with the number of units held. This is an important distinction from a discretionary trust. For this reason it is often preferred by groups of investors who don’t know each other well or are not part of the same family.

Hybrid trusts are a subgroup of unit trusts, where the trustee has a degree of discretion. These are uncommonly used.

Advantages of Unit Trusts

1. It is a safer option for holding trust with unrelated or little known parties.
2. It is a useful trust for real estate otherwise real property because transfers of units will not incur stamp duty. This is subject to land rich calculations. The trust lawyers at BSM can apply to the Office of State Revenue to see if this applies.
3. Another reason that unit trusts are used for investment in real estate is because taxation is calculated for the beneficiary or unit holder not the trust as a unit trust is not considered a tax paying entity. This means that upon the sale of real estate the beneficiary or unit holder may be entitled to a 50% discount on capital gains tax. This is not available when the real estate is owned by a company.

Disadvantages of Unit Trusts

1. Unit trusts provide less asset protection than a discretionary trust because each beneficiary has a fixed entitlement in proportion to their holding units. This means that the beneficiaries assets and income may be available to creditors.

Testamentory Trusts 

This is a trust established under a will, but is not the same trust as the deceased estate. It is usually a form of discretionary trust depending on the drafting of the testamentary trust clause. Testamentory trusts are often established in a will for the benefit of family members, particularly children under the age of 18.

Advantages of Testamentary Trusts

1. It can provide tax benefits to beneficiaries because taxable income can be spread over different years.
2. It provides flexibility in regards to any decision about the timing of any sale of real estate which may trigger a capital gains tax event.

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Types of Non-Express Trusts

Resulting Trusts

This is an uncommon form of trust. These may arise when payment is made for property and the property has not yet been transferred to the payer. This only becames relevant if a dispute over ownership arises.

Constructive Trusts

A constructive trust may arise where one party has contributed to property. It is a means by which that party can seek to recover those funds or property. It is described in the case of Muchinski v Dodds 1985 (HCA) where one party paid for the property and the other developed the property. Upon separation, the court held that the party that developed the property had a constructive trust over the party. This entitled them to be awarded for the value of their work on the property.

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