Family Trusts

A Plain English Guide for Australian Families

N. E. Renton, Rod Caldwell

• Publisher: Wiley
• Year: 2014
• ISBN:
  9780730310358
• Edition: 5
• Topic: Personal Development
• Subtopic: Personal Finance

Demystify family trust planning with this easy-to-read guide

Family trusts can be quite complex and difficult to set up correctly, and many people don't realise just how beneficial a trust can be. Even for families of average income, trusts deserve a second look. Family Trusts: A Plain English Guide for Australian Families of Average Means, 5 th Edition is a comprehensive guide to the advantages and disadvantages, investment nuances, taxation regulations, and social security rules surrounding trusts. This book, by author Nick Renton, and newly updated by Rod Caldwell, provides the information you need to make an informed decision and ask the right questions of your financial and legal advisors.

The book details all aspects of both setting up and running a family trust, including discretionary versus unitised trusts, trust deeds, and the roles and responsibilities of settlors and trustees. You'll learn how trusts can be used to benefit philanthropic foundations, and how to manage a trust intended for the financial care of a child with an intellectual disability. This Fifth Edition has been fully updated for the 2014 – 2015 tax year, and amended to parallel the May 2014 budget. The new material details topics like:

• Rates and trustee qualifications
• Hybrid trusts and non-resident beneficiaries
• Borrowing by trustees, and trustee meeting minutes
• Protecting assets against creditors, bankruptcy, and divorce

The book also includes real-life case studies that provide examples of proper handling and help illustrate important concepts. Additionally, alternatives are discussed for situations where a family trust may not be the best structure to use. If you're an average person wishing to ensure your family's financial well-being, Family Trusts: A Plain English Guide for Australian Families of Average means, 5 th Edition is the most complete guide on the market.

CHAPTER 1
THE CONCEPT OF A TRUST

Just what is a family trust, and who should have one? The advantages and disadvantages of using a family trust structure are elaborated later in the text, but it may help to set out some background information first, starting with an analogy.

The concept of a will is better known than that of a trust. A will is a legal instrument that allows a person to nominate individuals who are to inherit that person’s assets after his or her death. The will can also impose conditions in regard to any such legacies or bequests. The person making the will is called the testator and the persons receiving the assets are known as the beneficiaries. The document also names an executor to handle the paperwork involved in distributing the assets in accordance with the law and with the testator’s wishes as formally set out in the will.

Commonly such documents appoint a person to be both ‘the executor of my will and the trustee of my estate’. Technically, the executor’s role is to convert the assets to cash as required, and also to pay the debts of the deceased estate; the trustee role follows on from that. However, in practice ‘executor and trustee’ is always viewed as a single appointment covering all facets. On the testator’s death, the executor becomes the legal owner of the assets but holds them only temporarily in trust for the beneficiaries.

Trust is a technical legal term that refers to a relationship based on confidence under which property is held by and formally vested in its legal owner, who is known as the trustee, but on behalf of other parties who are entitled to the fruits of that ownership — the beneficiaries (or objects) of the trust.

Types of trusts

Many different types of trust exist at law. For example, superannuation funds normally involve trust arrangements, as do many charities. Solicitors, stockbrokers and other professionals use trust accounts in respect of clients’ money. Other types of trust commonly encountered include cash management trusts and unit trusts generally. A purpose trust can be set up for the furtherance of a specific objective rather than for the benefit of one or more specific persons.

There are also statutory trusts created by law, for example in relation to persons unable to look after their own affairs, and there are even bare trusts, where the sole obligation of the trustee is to convey property to beneficiaries when required to do so.

A trust involves a legal obligation to hold property for the benefit of others. A donor who makes a gift by means of a trust is able to stipulate how the property concerned is to be used; such control would not apply in the case of an outright gift. This ability to impose obligations on the recipient of property makes the trust format attractive to donors who want the greatest degree of assurance that their gifts will be used as they intended.

For the purposes of this book, an inter vivos (between living people) family trust can be thought of as a similar arrangement to that provided by a will, except that it is established by a trust deed and allows a person to pass on his or her assets while still alive. It is also possible to set up a family trust by will rather than by deed. Such a trust, known as a testamentary trust, comes into existence only on the death of the testator rather than immediately a trust deed is executed. This aspect is further discussed later in the book.

Either way, the beneficiaries of such a trust are normally family members of the person instigating the arrangement. Often some selected charities are named as additional beneficiaries. The term family trust is purely descriptive rather than legal. A family trust can be, but does not have to be, a unit trust.

In the case of an inter vivos trust the legal document, which roughly corresponds to the will, is called a trust deed, or sometimes a deed of settlement or indenture. Beneficiaries can be named individually, but more commonly in a modern deed they are named as a broad category, such as ‘all the children of John Henry Smith’ — or, in practice, some more elaborate version of this.

The deed can also spell out appropriate rules or conditions. The whole arrangement is really just an elaborate means of making a gift with, if desired, certain strings attached. The conditions can deal with virtually anything, but the courts do not enforce conditions that seek to impose illegal conduct or are even against public policy.

A trust created by deed is sometimes referred to as an express trust or a declared trust, as distinct from a constructive or implied trust. The latter is established by conduct — for example, by opening a bank account with the words ‘as trustee for’ in its name.

Beneficiaries

With a deceased estate, the normal (although not invariable) objective is that the executor should distribute the assets to the beneficiaries as quickly as possible and then disappear from the scene. With a family trust, in contrast, the intention is usually that the arrangement should last for a long time.

The class of beneficiaries can extend to children yet to be born and to marital partners yet to be acquired. Because of this it is usually best not to specify beneficiaries individually by name unless there is a particular reason for doing so. Indeed, in some cases naming a person as a beneficiary in a trust deed might raise false expectations.

Numerous variations on beneficiaries are possible. For example, siblings, cousins, half-brothers and half-sisters, stepchildren, adopted children, de facto spouses, ex-spouses, same-sex partners and grandparents can all be included or excluded, according to individual preference.

Beneficiaries do not have to be natural persons; so, for example, family companies, other family trusts, or unconnected charities and non-profit organisations (preferably ones that have been incorporated) can also be included. Pets cannot be beneficiaries, however, although a person willing to look after a pet could be appointed instead!

It is usually desirable also to name an entity — for example, a favourite charity — as the residuary or default beneficiary, in order to cover the possibility that none of the other potential beneficiaries is alive when assets are to be distributed.

Trust deed

Generally speaking, a trust deed cannot have retrospective effect. However, a deed could be used in order to confirm in writing the details of a trust that had previously been set up verbally. A trust deed would normally name the initial trustee or trustees and set out the mechanism for filling casual vacancies and for making any additional appointments required.

Legal entity aspects

It should be noted that a trust is not a legal entity, although the goods and services tax legislation discussed later treats trusts as entities for purposes of that legislation. Unlike a company, a trust estate — or, for that matter, a partnership — is not a separate ‘person’ in the eyes of the law. (A trust estate, for this purpose, includes a deceased estate.)

This principle extends to the...

Table of contents

• Cover
• Title Page
• Copyright
• About the Authors
• Preface
• Chapter 1: The concept of a trust
• Chapter 2: Modern family trusts — advantages and disadvantages
• Chapter 3: Types of family trusts
• Chapter 4: The trustee
• Chapter 5: Administrative aspects of a trust
• Chapter 6: Income tax
• Chapter 7: Capital gains tax
• Chapter 8: Taxation of family trusts
• Chapter 9: Social security
• Chapter 10: Investment decisions
• Chapter 11: Other types of trusts
• Chapter 12: Other issues to consider
• Appendix A: Wills and trusts compared and contrasted
• Appendix B: Differences between trust deeds and powers of attorney
• Appendix C: Tax rates 2014–15
• Glossary
• Index
• Advert
• End User License Agreement