Trusts & Wealth
Success Using Trusts For Wealth
De-mystifying Trusts & Trust Planning
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The Use and Evolution of Trusts and Foundations is a Special Interest.
Historical Evolution Of Trusts
There are a wide variety of trusts with many common names but the essence of the trust lies in the principles of equity which were developed in the Courts of Chancery. This was a court set up separately from the existing court system by the King.
The court would listen to claims based on fairness or what was equitable. These maxims gradually became to be known as the principles of equity and the concept of a trust was established in England.
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What are They?
Part of Their Succession & Wealth Planning.
A testamentary trust is a discretionary trust established under a Will. The testamentary trust does not come into operation until your death.
Instead of assets passing directly to an individual, they pass to the trustee of the testamentary trust.
The most underrated use of trusts is in our view are will trusts or testamentary trusts. Doing a simple will does not make sense with the amount of intergenerational wealth transfer. It is easy to establish a testamentary trust as part of your will & wealth plan. Ask us how?
Typical Clients in Trust &
Wealth Law Matters Include...
Discretionary Trusts-Assets, Wealth or Tax Planning?
Over the last 30 years, successive Governments and the taxation office have moved against the use of trusts for income splitting.
Therefore, you have extraordinary and complex rules that prevent say professionals or those with personal exertion income, using discretionary trusts. The use of discretionary trusts is to move assets away from an individual who may be in a high-risk occupation or subject to litigation threats, to a trustee.
Our clients to use them to hold assets for asset protection purposes. The trust is established to benefit their children in the future and as a wealth protection and wealth accumulation tool. Professions such as architects, engineers, doctors, lawyers use of discretionary trusts for this purpose.
Combining Discretionary &
We have drafted a number of hybrid trusts whereby we take advantage of fixed entitlements to say for example, a residential home to take advantage of tax exemptions.
The trust also has discretionary beneficiaries as well as units which entitle a fixed interest.
We draft bespoke trusts to suit particular client needs so as to avoid the pitfalls of a discretionary trust and yet have the benefits of the ability to stream income to low tax beneficiaries.
Suited to Australian assets, considerations such as home exemptions, stamp duty and land tax make this area a minefield.
Considerations such as the CGT home exemptions, stamp duty and land tax make this arae a minefield that is suited to hybrid trusts.
Offshore Wealth Protection Trusts and Offshore Foundations
Whilst trusts are a creature of equity, civil law jurisdictions typically use foundations. However there is no restriction on a foundation and all trust being used in say jurisdiction such as Dubai. An offshore foundation can also establish a discretionary trust or any other type of trust.
These more complex structures but ultimately provide for the ultimate flexibility and sometimes influence over assets, inheritances and investments without having any beneficial control over the funds.
These substructures typically suit high net worth individuals and generally are located robust jurisdictions as part of a family office structure.
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25 of the Most Common Uses & Types of Trusts.
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In reading the table below, please note that many jurisdictions in the United States offer revocable trusts. The trust you have when you don’t have a trust. Some of these features are not recognised in other countries but are fantastic to use within that jurisdiction.
We have not listed foundations which are civil law (European) creatures and are based on a charter with no particular beneficial owner. This is important when we look at control and beneficial ownership in terms of taxation and asset protection.
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Trusts & Wealth FAQ's
No. Name What is it? Typical Uses
Beneficiaries of a discretionary trust have no claim or legal entitlement to any portion of the trust income (nor capital in some cases). They only receive a benefit when the trustee exercises their discretion and distributes the income.
The essence of a discretionary trust is that the trustee’s legal obligation is to consider beneficiaries for a distribution; not to actually make a distribution.
This means that you can have a list of beneficiaries which may be a family for example all related companies but you will decide in any particular year depending on the type of income and the amount of income who if any person is to make distributions to.
If the trustee distributes the income the trustee generally pay tax on that income. The trustee retains an income and the trustee many jurisdictions impose penalty rates for undistributed income or if the income is distributed to minors.
However the uses tax planning vehicles is diminished and they are more important as asset protection vehicles. This means that no beneficiary has a vested present entitlement. I could be bankrupt for example and have all my assets validly in the trust, subject to clawback provisions and depending how it was done, the assets remain protected and I may STILL receive distributions.
The net effect is that a person’s status as a beneficiary does not result in a tangible gain or proprietary interest in the trust property. As there is no claim to the property, you are not subject to tax implications if you do not receive a distribution.
Disadvantages can include that the trustee can stop distributions to a particular beneficiary at any time. Likewise, a beneficiary can do little to change this arrangement. This can present a problem should a dispute arise with the trustee, for example, a family fallout. This is a key reason why you should exercise great care when selecting a trustee.
Of course in the United States there are revocable trusts in some states (eg. Nevada) There are also letters of wishes. There are also Protectors that control the trustee or EnforceRs and so on. It also set up your own trustee company and is a private trustee company there are many ways to have some control but if you have too much control you will be considered not to have divested the asset it will be considered to be a sham trust.
Companies and individuals can be beneficiaries of a trust, and they’ll fall into one of the following categories:
The primary beneficiaries are those whom the trust names explicitly. In a trust set up for a family, this will most often be the husband and wife, de facto partners, etc. The relationship with the primary beneficiaries will typically define the classes of the beneficiaries (see below).
These are the people that fall within a particular class of beneficiaries depending on their relationship with the primary beneficiaries. For example, if a trust deed states that general beneficiaries include brothers, sisters, children, grandchildren or other descendants, whether a person falls into the class of general beneficiaries depends on their relationship with the primary beneficiaries.
Money that the trust generates, for example, through interest earned on trust money in a term deposit or rent earned from a residential property owned by a trust, can be distributed to a beneficiary.
Capital beneficiaries may receive capital from a trust but not any income earned by trust assets.
Distributions are made by default to these beneficiaries unless the trustee decides they would like to distribute them to others.
Yes, but you should be aware that if a trustee distributes income to someone under 18, they will be subject to a substantial amount of tax. Aside from tax, people under 18 are not legal persons in most jurisdictions while distribution is made to them their parent or guardian will be the controller.
Yes of course. Trusts are gifted any property you may so choose or trading trust may acquire property.
Of course of its real property taxes and transfer charges. It may be better to sell the property and make a gift of cash.
If you set up a new trust, you can transfer property that you already own into it. You should know that the transfer of property into a trust will generally be classed as a sale. This can be an expensive exercise as, in addition to the appropriate sales contracts/agreements, this can incur Capital Gains Tax and stamp duty. Ensure that you speak with an accountant if you’re looking to establish a trust and transfer existing property.
Approximately 5% of all businesses in Australia operate through a trust structure. If you are going to run a business through a trust, you will require an Australian Business Number. As with all trust property, the trustee will own the business’ assets.
Legally this is an interesting question.
You will need to speak to us to get all the answers.
The primary duty of the trustees is to protect trust assets.
Consider how a trustee may then be breaching its obligations by engaging in trading?
And what if the trust trades through a wholly-owned company? who will be the directors of the trustee as a director of the trading company, is that a conflict of the trustee’s duties?
Don’t be fooled into thinking that this simple.
This is why the British Virgin Islands created “Vista trusts” that provide a legislative authority trustees to engage in trading, without breaching the duties of the trustee.
Watch this space when insolvencies happen.
Another frequently asked question about trust concerns whether the beneficiaries of trust all have to be from the same family. A family trust and a discretionary trust are essentially the same. The trustee maintains the discretion to distribute income as they see fit. It is more likely, however, that the beneficiaries are all members of the same family. A family trust is simply a commonly used term, rather than a requirement that the beneficiaries all be from the same family. Therefore, there is no restriction on you listing people outside your family as a beneficiary.
However, if you do list people outside your family, you may not be able to make a family trust election for tax purposes. This means you will lose access to certain concessions and benefits you would otherwise get if you make the family trust election. Further, if you make distributions to people outside your family, the trustee might need to pay tax on these distributions at the highest marginal tax rate. This is if you have made a family trust election to the Australian Taxation Office for that trust.
Leaving aside the tax obligations, you can have unborn beneficiaries and it all depends on your definition of “family” within the trust deed.
A trustee is considered to have a fiduciary relationship in administering the assets for the sole benefit of the beneficiaries. The scope of a fire Nutri relationship is vast and complex is the subject of many books and cases.
Fiduciary obligations are a set of conduct rules which a trustee must follow. The reason why a trustee must hold true to their fiduciary obligations is to ensure they act in an honest and reasonable way, and do not use their position as trustee to benefit themselves.
A fiduciary relationship exists when a person (the ‘fiduciary’) is in a position of significant trust and confidence over another. The fiduciary relationship arises in circumstances where the fiduciary is required to place the other person’s interests before their own. The trustee-beneficiary relationship is one of the prime examples of a fiduciary relationship.
There are also many other circumstances where a fiduciary relationship exists.
Some factors below indicate that a fiduciary relationship exists
The factors that indicate that a fiduciary relationship exists include:
- trust and confidence placed in a person;
- an undertaking by that person to act on behalf of another;
- the other person is vulnerable as a result; and
- there is an inequality in bargaining power between the two parties.
A fiduciary such as a trustee will owe the beneficiary certain obligations.
- The trustee must not enter into transactions which give rise to a conflict of interest between the trustee’s personal interests and their duty owed to the beneficiary.
- Example: The manager of a share portfolio must buy and sell those shares which will be of the most benefit for the trust and its beneficiaries, not just those from which the manager might earn a bigger commission.
- The trustee must account to the beneficiary for any improper gain obtained as a result of:
- a conflict of interest. Such as proceeds gained by the trustee as a result of selling a car held on trust for the beneficiary; and
- knowledge or opportunity gained as a result of their position.