A Guide to the Different Types of Trusts
August 20, 2023 Jennifer AndradePhilip Evangelou
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When understood properly, trusts can help people successfully plan finances, provide security for families, or achieve confident investing. Trusts, in essence, allow for one person (or a company) to hold property for the benefit of another person or a group of persons. The one holding the money is the trustee and the one for whom it is on hold for is known as the beneficiary. There are numerous types of trusts and it is important to identify which type of trust will best suit the overall goal for having one. So here are the main types of trusts and their purpose.
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When understood properly, trusts can help people successfully plan finances, provide security for families, or achieve confident investing. Trusts, in essence, allow for one person (or a company) to hold property for the benefit of another person or a group of persons. The one holding the money is the trustee and the one for whom it is on hold for is known as the beneficiary. There are numerous types of trusts and it is important to identify which type of trust will best suit the overall goal for having one. So here are the main types of trusts and their purpose.
Fixed Trust
Fixed trusts are the most known of all trust types as they are simple in form. Fixed trusts provide for a specific proportion of assets to be distributed to specific beneficiaries. A trustee is bound to distribute the assets as beneficiaries have an automatic entitlement of their portion and can enforce the administration of the trust. This format is useful in avoiding potential conflicts between multiple beneficiaries over their interest in the trust. Beneficiaries will also enjoy a 50% discount off their capital gains tax over any assets received from the trust.
Discretionary Trusts
Discretionary trusts contrast fixed trusts as the beneficiaries do not possess a fixed interest over the assets in these trusts. These types of trusts give trustees the power to decide when, how much, and to whom to distribute assets. This flexibility provided to trustees goes even further in that they can remove or add a beneficiary to the trust at any time. However, with this power comes at a price as it is the trustee who is liable for any loss or debt incurred through the trust.
Discretionary trusts also receive a 50% discount off the capital gains tax and allow for asset preservation as the assets in the trust are separate to the assets of the beneficiary. This means that if a creditor is collecting assets from a beneficiary to repay debt, their assets in the trust will be safe from this as the beneficiary has no entitlement over the trust.
Hybrid Trusts
A hybrid trust is a great alternative to fixed and discretionary trusts as it is a mix of the two. It allows for beneficiaries and trustees to enjoy the benefits that come with both trusts which mainly are that beneficiaries enjoy a fixed interest to assets and trustees have discretion over its distribution.
Charitable Trusts
As one can gather from its name, charitable trusts are trusts set up for a charitable purpose. This purpose can be for a range of things such as to reduce poverty or improve social and public welfare. An example of this is when a person (the donor) nominates an organisation to whom the funds of the trust will be distributed once they die. This type of trust allows for donors to claim tax deductions on any donations made to the trust and unlike most trusts, does not wound up after 80 years. However, as the charitable focus of a trust will inevitably affect the public, these types of trusts will be heavily monitored.
Superannuation Trusts
Superannuation trusts are made for the purpose of providing security during retirement. All superannuation funds in Australia are superannuation trusts and will be subject to federal legislation that set standards for all superannuation trusts to satisfy. The most well known of these legislative requirements is that access to these trusts is prohibited until the age of 65.
Superannuation trusts are a great alternative to public superannuation trusts (superannuation funds) as it allows a person to control their own retirement funds and determine investments. The administrative costs associated with managing a superannuation trust can also be less than the continued fees set by public superannuation trusts. However, these types of trusts require continuous and vigilant attention to the fund’s investments, the economy, and legislative changes to ensure compliance with legal requirements over trusts.
Testamentary Trusts
Testamentary trusts hold assets that are distributed once the set who set it up (the testator) dies. This type of trust is created through a will and only operates once the death occurs. A trustee has full discretion over the assets and their distribution. A person may choose to set up a testamentary trust for several reasons such as to prevent a challenge to a will, to ensure a person’s estate it passed to the desired relatives, or to take advantage of its tax benefits.
Bare Trusts
Bare trusts are often used by beneficiaries who want to have someone else hold their assets on their behalf without giving them any control. There will only be one trustee and one beneficiary in a bare trust and the beneficiary will have complete control over the nominated trustee. Therefore, the trustee will only be responsible for holding the assets and must follow the beneficiary’s instructions. As the beneficiary has an absolute right to the assets in the trust, these trusts do not provide the same level of asset protection compared to other forms of trusts and creditors will have access to it.
Unit Trusts
Unit trusts operate a little differently to the other types of trusts as the beneficiaries are the ‘unit holders’ who have interest over their ‘holding units’ within the trust. These units are similar to shares as it allows unit holders to divide their interest in clear and fixed percentages. Therefore, if someone has 50 units in a unit trust, they will have a 50% interest in the trust’s assets against the other unit holders. This is a fixed entitlement and the unit holders can transfer their units to a buyer if they wanted to. This type of trust is commonly adopted by people seeking to put their money together with other people in a ‘pool’ of assets for investment purposes. An example of this would be a retail investment fund. However, unit trusts can be used by smaller investors for small scaled property investments. Overall, unit trusts provide security for people investing their money alongside other investors and also provides unit holders with a 50% discount on their capital gains tax.
Now, which one?
The range of trust types allows people to establish a trust that best suits their needs. It is important that a person wishing to set up a trust evaluates their goals and motives. Particularly, look at whether the trust is to provide family with financial stability, gather investments or to rearrange assets.
If you need assistance with trusts get in touch with us via the contact form or by calling 1300 337 997.
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About Jennifer Andrade
Jennifer is a legal content writer with OpenLegal, with a particular interest in employment, contract and copyright law.
About Philip Evangelou
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.