Monday, 29 February 2016

Trusts

Youth Carrying Bag of Money - photo by Marcus Cyron courtesy of Wikimedia Commons

Trusts are very interesting, from the legal point of view.  Unlike individual persons or companies, they aren't thought of as being a "legal person".  It is the trustee of the trust (which can be a person, or a number of persons acting jointly, or a company) that is the "legal person" who represents the trust.

A major exception to this non-personality idea is that trusts are required to pay taxes on income, just like people and companies, on income that is retained by the trust and not distributed to beneficiaries in each financial year.

A trust is really a relationship between some property (the trust fund), the person who manages and looks after the property (the trustee), and the person(s) for whose benefit the trust has been set up (the beneficiary or beneficiaries).  The rules that govern the relationship are set out in the trust deed.

Setting up trusts can have tax advantages for the people involved.  For example, if a business is owned by a private (Pty Ltd) company, its income after deductions would be taxed at the corporate tax rate. If the business is operated by the trustee on behalf of a trust, however, the income flows into the trust and then flows out again as distributions to its beneficiaries.  Let's say there are four beneficiaries, because the business is operated by two married couples.  This means that the income could be split into four parts and each person would pay income tax on his or her share at the applicable personal tax rate(s), including the tax-free threshold on the first part of that income.

A trust can also be set up under a person's Will. This type of trust is called a testamentary trust.  In the case of a testamentary trust, the beneficiaries are usually people like the Will-maker's spouse and children.

In addition to the trust deed, or in the case of a testamentary trust, the Will, trustees are controlled externally by laws, both common law principles and statutes.  One of these default principles, for example (which applies in Australia) is that if there are multiple trustees, the individuals have to agree unanimously on any decision.  Many of these rules can be modified by the trust deed or testamentary trust Will.  For example, if the trust deed appoints three persons to act jointly as trustees, it could say that if 2 out of 3 trustees agree, they can proceed with an action even if the third trustee disagrees.

Trust deeds are often arranged for clients by non-lawyers, e.g. accountants, or by online service providers, as standard documents. These documents have been drafted by lawyers and normally are adequate for their intended purposes. But, if any variations to the standard document are required, it would be appropriate to engage a lawyer to consider and make those edits.  You can save money up front by using a template, but you could also end up losing money down the road in wasted time and unnecessary disputes if the template has not been adapted correctly to your particular needs.

This blog post reflects the law in Australia at the time of writing.  It is intended only as a general discussion of educational and informational topics, and is not intended as legal advice for any person.  If you would like assistance with an Australian trust deed, please contact the author via the Irving Law website.




2 comments:

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