The use of trusts in business and family structures is an acceptable and important part of arrangements for asset protection, income protection, estate planning and tax planning.

Discretionary family trusts provide a very flexible structure for asset protection, tax planning and to maintain business investments for future generations.  Unit trusts are a more rigid structure where multiple owners may be involved, but similarly provide some level of asset protection and tax planning.  Increasingly, testamentary trusts (established in wills) are being utilised as a method of passing generational assets on the death of a parent or business owner.

Trusts have different tax treatment from some other structures, and it is important to ensure that those utilising trust structures are aware of income tax, capital gains tax and other implications.

It is also important to be aware that, although increasingly trust deeds can be “purchased off the shelf”, not all trust deeds are the same and it is important that some of the provisions of trust deeds be reviewed carefully.

Range of beneficiaries

The advantage, particularly of discretionary trusts, is that a range of beneficiaries can potentially benefit from the income and capital of the trust.  It is important that the definitions and descriptions of beneficiaries be accurate, that capital beneficiaries be specifically identified and that the range of beneficiaries is tailored to your particular circumstances.  Increasingly, families take on an extended definition, with multi-generation, multi-marriage, etc through the life of an individual.  It is important that the range of beneficiaries potentially available under the trust takes into account all of these circumstances, both now and in the future.

Definition of income and capital

Given the sophistication of tax law in Australia at present, trust deeds should be structured so as to enable separate distribution of types of income and separately, capital.  Income should be defined according to its usual categories and allow separate distribution of each category of income.

Trustee’s powers

Trusts should have the powers of trustees drafted as widely as possible, to permit trustees to deal with income, deal with assets, make business decisions where necessary, and otherwise deal with trust assets and operations effectively.

Limitation of liability

A number of legal cases have established the principles by which trustees could be liable for actions in relation to trusts.  It is important that trustees be protected as much as possible, so that the trust can operate with “limited liability”.  Accordingly, the provisions in the trust deed should be drafted as broadly as possible to indemnify the trustees out of the trust assets, and to limit recourse to the trustee personally for any conduct.

Usually the trustee will be a corporate entity, although some trusts have been established with individuals.  There is significant benefit in ensuring the trustees are a corporate entity, because of the protection of the limited liability of a company, as well as longevity of a company, whereas individuals may die, become sick or disabled.  A company can hold trust assets separately, whereas there may be confusion with individual trustees as to which assets are held individually and which are held on trust.

Appointor/Guardian

Usually the appointor or guardian of a trust has ultimate power and control, particularly with the ability to remove a trustee at any time, and appoint some other entity as trustee.  It is important to describe the appointor and guardian carefully, so that it is not just limited to an individual or individuals, but also to allow them to appoint new appointors on their death or disablement.  For estate planning purposes particularly, the descriptions of appointors (and guardians) should be carefully considered, so as to deal with the circumstances where the principal individual who ultimately controls the trust, may die or become disabled.

Amendment of trust deed

The trust deed should contain broad powers of amendment.  There will be many circumstances in the future where adjustments to the nature of the trust may be beneficial.

However, the power of amendment should be used sparingly, so as to avoid any suggestion that the trust is being “refreshed” for capital gains tax purposes, or reconstructed, creating a CGT disposal.

Some trust deeds, established in the 1970s/1980s, had limited or no powers of amendment.  This has created enormous difficulty in being able to deal with those trusts in this modern age.

General

Most trust deeds, prepared by reputable advisers, will have considered most of these issues.  Accordingly, an “off the shelf” trust will usually ensure that most of these issues are dealt with in the provisions within the deed itself.

However, the trust deed must still be tailored to your particular circumstances, considering who is to be the trustee, who is to be the appointor, what is the range of beneficiaries and considerations for the future, particularly estate planning.

Russell Kennedy is available to assist in relation to these issues.