Do I need a trust fund?

It is likely that you have heard of trust funds, and you may be aware that superannuation funds are trust structures. These legal structures are found in the areas of superannuation as well as estate planning and can be highly useful for those wishing to protect their assets after they are gone. Trusts are also highly beneficial tools for higher-income earners as they can be used to reduce that individual’s taxable income, as income is taxed at the marginal rate of the identified beneficiaries. To find about more about these structures and how they can benefit you, continue reading.

What is a trust fund?

A trust is a financial tool or legal structure which enables assets including money, investments and/or property to be held for the benefit of particular individuals called beneficiaries. A trust can be viewed as the middleman between the trustee, who is the legal owner of the assets and the beneficiaries who are the parties who receive the assets at a particular time. In 2017 it was recorded that there were more than 800,000 trusts in Australia with assets totaling more than $3 trillion. Trusts also come in many different forms and can include testamentary trusts as well as fixed, discretionary, and constructive trusts.

Who should have a trust fund?

A trust may be particularly beneficial to higher-income earners as the income generated from assets within the trust is taxed in the hands of the beneficiaries. This means that any assets held within the trust structure will not be taxed at the marginal rate of the trustee or original owner of the asset, but that of the beneficiaries. The advantage of discretionary trusts is that more income can be distributed to lower-income earners in order to reduce the overall taxable income. This enables high income earning individuals to make use of the tax-free threshold and the lower tax rate that may be enjoyed by the beneficiaries of the trust.

However, in the case where the beneficiaries are below the age of 18, the trustee must pay tax on the income generated from the trust assets on behalf of those beneficiaries, which can be up to 66%. Another consideration is that any income earned that fails to be distributed to the beneficiaries will be subject to the tax rate of higher-income earners which is likely to be counterintuitive when establishing a trust. Therefore, it is important that the trust is actively managed by the appointed trustee in line with the terms of the trust instrument.

Why set up a trust?

You may be wondering why a trust is necessary and why the owner of the assets cannot retain the assets or gift them to the beneficiaries. The main incentive to establish a trust is to separate the individual who controls the asset from the intended owner of the asset. This is primarily relevant to family trusts whereby the beneficiaries are under the age of 18 and therefore the assets are held on trust for them by the trustee until they become of age and can hold the assets personally. Trusts also protect assets during estate planning or can be used as a business entity when investing.

What are the requirements to set up a trust?

There are certain requirements to establish a trust and these elements must be satisfied before a trust comes into force. This includes the following:

What are the different kinds of trusts?

There are several different kinds of trust which serve different purposes, whereby the kind of trust that is established will be contingent on the situation and the objectives the original owner of the assets wishes to achieve. The most common kind of trust is a fixed trust or a unit trust. A fixed trust has definitive entitlements under it and the beneficiaries are known and expressly stipulated in the trust deed.

This differs from a discretionary or family trust whereby the trust deed empowers the trustee with the discretion to decide which beneficiaries receive an income from the assets within the trust as well as how much is received.

A testamentary trust is a form of discretionary trust that is established in a Will. Upon the death of the Will-maker, the deceased’s assets are distributed to the trustee/s of the testamentary trust. The trustee then holds the assets for the nominated beneficiaries. Therefore, unlike a regular will, the assets are not immediately inherited by the beneficiaries. These trusts are predominantly used in situations whereby the Will-maker has concerns about how the beneficiaries will spend the money. This could include children who have gambling, drug or other addictions or where they are in an unstable relationship and therefore a trust can prevent a de facto partner from receiving part of the assets in the event of a relationship breakdown.

If you are a higher income earner and think your current financial circumstances would benefit from establishing a trust or would like to discuss how a trust can benefit your estate plan, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.

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