A trust exists when someone holds property for the benefit of someone else. One useful metaphor I have heard is that you can think of a trust like a child’s little red toy cart. The child puts all their toys and possessions into the cart. The child can pull the cart around himself, or could get someone else to pull it around for him. If the child falls over, then his possessions are safe in the cart. In this example, whoever has control of the cart is the trustee of the trust. The child falling over could be likened to someone going bankrupt or some other crisis in their life – at a time of crisis the assets in the trust are protected.
Trusts have traditionally been used as a tax minimisation vehicle, and this is still one of the reasons why a family discretionary trust is so popular with accountants, along with the income splitting ability. Over the years, quite a few of the tax advantages of various types of trusts have been scaled back, but they are still used as a structure for investment, operating a business or for asset protection and wealth creation.
Trusts can be created for many reasons, so your objectives for the trust are important in determining which is the right kind of trust. Trusts can be set up during your life, or in a Will to take effect after you die. Here are some comparisons of different trusts:
Inter Vivos Trust v Testamentary Trust
An inter vivos trust is one that is created during your life, or during the life of the person setting it up. A testamentary trust is any form of trust set up under a Will.
Discretionary trust v Fixed trust
A discretionary trust is one in which the trustee has wide discretion in relation to the dealings with the trust property, and how income and capital are distributed between a group of potential beneficiaries. A fixed trust is one in which each beneficiary has a fixed, or proportionate, interest in the income and capital of the trust.
Discretionary trust v Bare trust
A discretionary trust gives the trustee wide discretion in relation to the dealings of the trust property. A bare trust is one in which the trustee has no discretion, but has limited control, and only one duty, including to convey the property on demand to a specified beneficiary.
Express trust v Implied trust
An express trust is one that is created by Deed – it has clear words and intentions to create a trust. An implied trust is one that the law imposes, based on the circumstances and that there would be an injustice if a trust wasn’t implied. Often an implied trust is created when only one spouse owns the family home, but the law implies that the spouse holds the property partially on trust for the other spouse who also owns part of it.
Private trust v Public trust
A private trust is one established for the benefit of a particular individual or group of people (eg. a family). A public trust (often known as a charitable trust) is one established for the benefit of a larger purpose.
Most family trusts are an express, private, discretionary, inter vivos trust!
In estate planning, we have a wide range of testamentary trusts we could utilise over inheritance for your beneficiaries, depending on what you want to achieve, such as:
- Superannuation proceeds trust
- Protective trust
- Special Disability Trust
- Education trust
- Capital restricted discretionary trust
- Fully flexible discretionary trust (usually limited to descendants)
When speaking to SPG Lawyers about your estate planning, we can explore what you’re trying to achieve for your beneficiaries, and find the right trust for you.
Writer – Jacqueline Brauman – Special Counsel & Wills & Estates Accredited Specialist at SPG Lawyers.
