Given the frequency in which people reference trusts when dealing with personal and business investments, it is concerning how much confusion exists as to the basic nature and operation of trusts. A trust is not a company or entity – it is a relationship. Fundamentally, a trust exists where there is a division between the legal and beneficial ownership of property. What this equates to is that formal legal ownership of certain property (and a degree of control over it) vests in a Trustee, while a Beneficiary is entitled to the benefits generated by the property.
What is a Trust?
A trust is generally created by means of a trust deed, and this deed will set out the scope of the Trustee’s powers, the property which is subject to the trust, and the scope of a Beneficiary’s entitlement. A simple example is a trust whereby the Trustee maintains and leases a residential property and the beneficiary is entitled to the proceeds. It may be that upon attaining a certain age, the trust comes to an end and the legal ownership will vest in the Beneficiary.
Trustees do not have unrestricted discretion in their dealings with trust property, as there are specific duties in which all Trustees must comply with. As such, the trustee only holds the trust property for the benefit of the Beneficiary.
Discretionary Trusts vs Unit Trusts
The most important distinction between types of trusts is that of discretionary trusts and unit trusts. Discretionary trusts exist on the part of the Trustee as a discretion as to distributions, whereas unit trusts, the distributions occur in fixed proportions or ‘units’. While ‘family trusts’ are often referred to as being a ‘type’ of trust, it is more accurate to say that the benefit and distribution of income to the members of a family is a common purpose for which trusts are established, and such family trusts can be both discretionary or unit trusts.
Before establishing a trust, it is important to discuss the various types of trusts and content of the trust deed with your solicitor. Forge Legal have a knowledge base of over 30 years dealing specifically with trusts and can guide you on how to best achieve your goals. We also highly recommend you discuss potential tax implications with a certified accountant, as often there is opportunity to benefit from various taxation implications as well.