As the world slowly starts to see its way through the COVID-19 pandemic, it’s more important than ever to protect your family and your business. In line with this, your financial advisor, solicitor or accountant may have suggested setting up a trust.
While we wrote about setting up Family Trusts in an earlier article, we think it’s important to start at the very beginning and talk about the trust deed. If you don’t get the trust deed right, it can leave you, your family and business open to the very things you hoped to avoid.
What is a trust?
In Australia, trusts are legal arrangements used for business and investment reasons. There’s a number of trust structures, each with its own rules, regulations, processes and tax considerations.
The ATO defines a trust as:
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.
A trust isn’t a person or a legal entity, such as a company. It’s basically a relationship between the trustees and the beneficiaries that is enforceable by law.
Why set up a trust?
A trust owns your assets. As they’re separated from your personal estate, this makes trusts beneficial in protecting:
- those too young to manage their own financial affairs
- incapacitated or vulnerable people
- those who may fritter away the family fortune
- against possible legal or financial liability.
What do you need to set up a trust?
Depending on your circumstances, setting up a trust can be relatively simple and straightforward. It may also be complex with lots of moving parts. As always, we recommend you seek sound financial advice from a Kelly+Partners team member.
To set up a trust, you’ll need:
- Settlor - The settlor is in charge of setting up the trust. This person names the beneficiaries, the trustee and, if applicable, the appointor. The settlor should not be a trust beneficiary (for tax reasons) and usually has nothing more to do with the trust after its creation.
- The trustee(s) - The trustee manages the trust. The trustee should be chosen with great care as they have substantial legal power over the trust’s assets and must always act in the best interests of the beneficiaries. All transactions for the trust are conducted in the name of the trustee.
- The beneficiaries - The trust is created and managed on behalf of the beneficiaries. They can be people or a company. Beneficiaries can be either primary beneficiaries (named in the trust deed) or general beneficiaries (often not named individually). General beneficiaries are generally current or future children, grandchildren and relatives of the primary beneficiaries.
- The appointor - Some trusts have an appointor. The appointor is important because they can appoint and remove the trustee.
- The trust deed - The trust deed (or the will if it’s a testamentary trust) is the formal document which stipulates how the trust will run and what the trustee can do. It’s especially important to have the trust deed or will prepared by a solicitor in collaboration with your financial team.
The trust deed
The trust deed is the legal document that stipulates how the trust will run and what the trustee can do. It sets out the terms, conditions and rules for the creation and maintenance of the trust. These may include:
- the objectives of the trust fund
- the trust’s assets
- the beneficiaries
- how much money the beneficiaries will receive
- the payment method, such as a lump sum or as regular income
- how and when the trust can be ended
- how the trust bank account(s) will be managed.
The trust deed will be signed and dated by all trustees and implemented according to state and territory laws. Trust deeds should also be reviewed and updated regularly.
Why is it important to have a trust deed professionally drawn up?
As tempting as it may be to cut corners when drawing up your trust deed, not having it professionally crafted and administered can cause the very problems you were hoping to avoid in the first place.
Just a few things a financial advisor, accountant or solicitor can help you with when setting up your trust deed:
- the right type of trust to suit your specific needs
- determining if the trust aligns with your long-term goals and objectives
- how the trust will work
- have you thought about all aspects of administering the trust?
- choosing the right trustee and appointer, as both wield significant power within the trust
- helping you understand the consequences of trusts in estate planning, asset protection and family law
- the actual drafting of the trust deed.
Who drafts the trust deed?
While Kelly+Partners can assist with setting up a trust, we do not draft the actual draft deed. The drafting is handled by a lawyer or solicitor. You can use your own solicitor, or we can help you find someone suitable.
Don't lost your trust deeds
A recent case in the Supreme Court of New South Wales has highlighted the value of having access to your original trust deeds. Lost trust deeds are a common issue and while it can usually be settled quickly and out of court, if there’s a dispute or the ATO is litigating, the originals may need to be produced.
Don’t be tempted to set up a trust without a correctly drafted trust deed. By doing so, you put at risk any benefits the trust provides.
Interested in learning more?
If you have any questions about setting up a trust, please contact your local Kelly+Partners office today, set up a discovery session or give us a call on 1300 932 584. You can also request a call back at a time that suits you.
This offer for Private Wealth Services is not available to clients of BMF as at 31 December 2016.
Kelly Partners Private Wealth (Wholesale) Pty Ltd is a corporate authorised representative of Kelly Partners Private Wealth Pty ltd (AFSL: 516704, ABN 14 629 559 860). Any general advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider the appropriateness of the advice with regard to your objectives, financial situation and needs.
Kelly Partners Private Wealth Sydney Pty Ltd is a corporate authorised representative of Madison Financial Group Pty Ltd (AFSL: 246679, ABN: 36 002 459 001)