Setting up a trust fund

Are you thinking about setting up a trust but feeling overwhelmed?

 You’re not alone. The world of trusts, including testamentary trusts, family trusts, unit trusts, and fixed protective trusts, often appears complex and daunting. With over two decades of experience in trust law, we are here to help simply set up a trust fund. Whether you’re considering a trust for the first time or looking to expand your knowledge on the benefits and functions of different trusts, we tailor our services to make the process clear and accessible, ensuring you feel confident and in control.

How does a trust operate?

A trust operates through a clear legal structure involving three key roles: the settlor, who establishes the trust and defines its terms; the trustee, who manages the trust; and the beneficiaries, who receive the benefits from the trust’s assets or income. The trustee is obligated to adhere to the instructions laid out in the trust deed, which dictates how the trust should be managed. Trusts can be designed to be either flexible or fixed.

How do I set up a trust?

Setting up a trust might sound complex, but it’s quite manageable with the right steps and expert advice. Here’s how you can get started:

1. Define the purpose of the trust: What are your goals? This will determine the type of trust that’s best for you. Whether you’re looking to manage your family’s wealth, protect your assets, or plan for future generations, understanding your objectives is the first critical step.

    

2. Choose the trust type: Discretionary, unit, or fixed? Each serves different purposes and offers different benefits. A discretionary trust offers flexibility in distribution, a unit trust is often useful to run a business and a fixed trust simplifies the division of benefits.

    

3. Create the trust deed: Work with a legal professional to draft this vital document that dictates how the trust should be operated. The trust deed will outline the rules for the trust, specify the beneficiaries, and set forth the powers and obligations of the trustee.

    

4. Select a trustworthy trustee: Choose someone reliable to manage the trust. Their ability to handle this role is crucial to fulfilling your trust’s objectives. The trustee’s responsibilities include managing the trust’s assets, following the trust deed, and acting in the best interest of the beneficiaries.

    

5. Formally register the trust: If required, make sure your trust is registered with the necessary authorities. This step is essential for legal recognition and to ensure compliance with local and national laws.

6. Transfer assets into the trust: This finalises the creation of your trust. By transferring assets such as property, investments, or cash into the trust, you legally separate your personal assets from those controlled by the trust, securing them for the future and for the trust beneficiaries named in your trust deed.

What are the different types of trusts in Australia?

There are several trust structures, each designed for specific situations:

Discretionary family trusts

A discretionary family trust is one of the most popular types of trusts in Australia, particularly for family estate planning. In this type of trust, the trustee has the discretion to decide how the income and capital of the trust are distributed among the beneficiaries. This flexibility is useful for protecting assets and managing tax liabilities effectively.

Testamentary family trusts

A testamentary trust is established as part of a will and comes into effect upon the death of the willmaker. It offers a high degree of control over the distribution of assets to trustee beneficiaries, which is especially useful when beneficiaries are minors or may not manage a lump sum inheritance wisely.

Unit trusts

In a unit trust, investments are managed collectively, but unlike discretionary trusts, beneficiaries (or unitholders) own a specific number of units. Income and capital distributions are made in proportion to the number of units each trustee beneficiary holds.

Fixed protective trusts

Fixed protective trusts are established to provide a fixed benefit to beneficiaries, which can be particularly advantageous when beneficiaries need certainty, such as for those with disabilities or specific financial needs. These trusts often include protective clauses that prevent beneficiaries from alienating their interest in the trust.

Managed Investment trusts

A managed investment trust (MIT) is a trust where the investments are managed by a professional investment manager. This type of trust is common for collective investment undertakings like commercial property investments or public securities.

What are the benefits of a trust?

Setting up a trust comes with many advantages.

Asset protection

Trusts offer a robust way to protect your assets from various external threats. By placing your assets within a trust, they are legally owned by the trust, not by you personally. This separation provides a shield against potential claims from creditors, legal judgments, or bankruptcies. Especially beneficial for business owners and professionals in high-risk industries, this arrangement helps ensure that your wealth is preserved for the benefit of your trustee beneficiaries regardless of your personal financial challenges.

Tax efficiency

One of the most compelling reasons for setting up a trust is the potential for tax optimisation. Trusts can be used to legally reduce tax liabilities through mechanisms like income splitting. For example, income generated by trust assets can be distributed among family members who are in lower tax brackets. This distribution can significantly reduce the total amount of tax paid by the family as a whole, as opposed to having all income taxed at the higher rate of a single family member.

Estate planning

Trusts are an essential tool for estate planning, ensuring that your assets are managed and distributed according to your wishes after your passing. Unlike a will, which can be challenged or subject to probate, a trust generally offers a smoother and faster transfer of assets to beneficiaries. Trusts can also be structured to release assets at specified times or based on certain conditions, providing you with control over when and how your heirs receive their inheritance.

Privacy

Privacy is another significant benefit of using trusts. Unlike wills, which become public documents once they enter the probate process, trusts (other than testamentary trusts) operate privately. The terms of a trust, including the identity of beneficiaries and details of asset distribution, do not become part of the public record. This confidentiality is particularly advantageous for those who prefer to keep their financial matters and family arrangements discreet.

Succession planning

Trusts facilitate a more controlled and uninterrupted transfer of assets across generations. By setting up a trust, you can avoid the complications and delays often associated with probate, which is the legal process of transferring assets if you only have a will. Trusts ensure that your assets are managed continuously according to the trust’s terms, regardless of your death or incapacity. This provides a seamless transition of stewardship and benefits to your successors, supporting long-term family wealth management and business continuity