A trust is simple. It creates a legal arrangement for the trustee to hold and manage the beneficiary’s assets. The most common use of trusts in asset management and estate planning is to protect wealth and ensure it is distributed in line with the settlor’s wishes. The benefit of using trusts is they are legally binding and when you rely on trusts, you can avoid the family fallouts from will disputes.
Is a trust right for you?
How Do Trusts Work
There are three people involved in a trust’s function.
The first is the settlor, who is the person who sets the trust up in the first place. The settlor places their assets in the trust. The second is the trustee. It’s usually a financial institution or lawyer, but it can also be an individual. Regardless, the trustee is charged with holding and managing the trust, ensuring the terms as laid out by the settlor are respected. The third is the beneficiary. The beneficiary could be an entity (charity) or an individual (family members and friends). The beneficiary receives the benefits from the trust. The settlor outlines the trust’s terms and conditions, deciding how the assets will be managed and how they will be distributed upon their death.
There are different types of trusts and each of them comes with its own benefits. We’ll discover each, their specific purpose, and the advantages they offer.
Types of Trusts and Their Benefits
Three common types of trust may benefit you.
Family Trusts
A family or discretionary trust is the most common trust for families holding assets for the next generation. The trustee holds the discretionary power to determine how best to distribute the assets to its beneficiaries.
The benefits include flexible distribution options, tax planning, asset protection, and greater control over asset management. It’s particularly useful if you have concerns about a family member contesting a will.
Testamentary Trusts
A testamentary trust can be worked out with your will and estate lawyers. It’s connected to your will and won’t come into effect until the settlor’s death. In addition to preventing a will estate dispute, this provides the trustee with more control over asset distribution. It can also protect assets for a vulnerable beneficiary or a minor, and there are tax benefits for beneficiaries, too.
Unit Trusts
A unit trust is similar to having shares in a company, it breaks up trust assets into units. It’s typically used for investment reasons, allowing many parties to invest. In addition to being used for business purposes, it’s also popular for joint ventures.
Discretionary Trusts vs Fixed Trusts
Once you’ve chosen the right trust, should it be discretionary or fixed?
A discretionary trust gives the trustee flexibility to distribute the assets whereas a fixed trust follows your pre-determined beneficiaries and the specific allotments you outlined at the time of its creation. It depends on your wishes.
Additionally, Special Disability Trusts can ensure the support you leave for a disabled loved one is protected.
The Benefits of Trusts for Family Wealth Management
If you’re thinking about a trust for family wealth management, there are many benefits.
A trust is an effective way to protect your assets, whether you’re concerned about legal claims or creditors. When your assets are held in a trust, they are separate from your estate.
You can utilise trusts for tax efficiency. You can distribute the income from tax assets effectively to ensure the beneficiaries fall into a lower tax bracket.
You don’t need to worry about estate litigation lawyers challenging a will when your assets are tied up in trusts. Trusts don’t form part of the estate, so the terms and conditions override estate law.
Many people choose trusts as a form of wealth preservation. You can leave instructions to ensure assets are passed down across multiple generations, reducing the risk of wealth erosion, whether as a result of mismanagement or over taxation.
When You Should Consider Setting Up a Trust
Is a trust right for you?
If you have significant assets that you want to protect against legal action or creditors, a trust is a beneficial solution. It’s a useful estate planning tool to ensure everyone in the family is provided for in line with your wishes without the worry of legal challenges.
Family businesses can use trusts to ensure a smooth transition from leader to leader, providing clear business succession planning.
Trusts can be used as a tax planning tool to reduce the tax burden on your beneficiaries by distributing them in the most efficient manner possible. It can also protect your estate against hefty tax burdens.
How to Set Up a Trust
There is a five-step process to setting up a trust.
Step 1
The first step is deciding which type of trust is right for you. Consider discussing this with a financial advisor who can provide the ins and outs on family, testamentary, and unit trusts so you find the one that matches your needs.
Step 2
With the type of trust chosen, it’s time to select a trustee. This should be someone you trust, but it also needs to be a competent person. This is why many people use an entity like a financial institution or law firm.
Step 3
You need to ensure your trust is legally binding to protect your assets and beneficiaries, so use a legal service to draft the trust deed.
Step 4
Once the trust deed is drafted, you can fund the trust by transferring the designated assets.
Step 5
You should review your trusts periodically to ensure they still meet your needs and comply with legal requirements.
Legal Considerations & Potential Pitfalls
If you’re thinking about creating a trust, you should seek legal advice to ensure it’s drafted correctly and compliant with the law. Many people fall into common pitfalls like choosing the wrong trustee, improper funding, or they don’t review it regularly enough to pick up on changes. Any time there’s a family change, you should review your trust, whether it’s a marriage, divorce, birth, or a change in financial circumstances.
Final Thoughts
Trusts are a useful tool for tax efficiency, wealth management, and asset protection. You can utilise them in your estate planning to protect assets against creditors and legal challenges, but you must use a lawyer to draft the deed to ensure it complies with Australian laws.
If you have concerns about your family trust and believe you haven’t been considered fairly, reach out to AJB Stevens for a free consultation about your case.
