Setting Up a Trust Simplified: A Step-by-Step Guide to Securing Your Assets
The world of wealth management can be a labyrinth, but one tool stands out for its versatility and robustness – the trust. Whether you’re safeguarding family assets, planning your estate, or managing a family business, understanding how to go about setting up a trust is a game-changer.
Outline
Key Takeaways
Trusts are legal arrangements used to protect the interests of beneficiaries and offer numerous benefits.
Setting up a trust involves selecting trustees, determining beneficiaries, creating a trust deed and obtaining an ABN & TFN.
Managing a family trust requires understanding tax implications and strategies while ensuring compliance with ongoing responsibilities.
Understanding Trusts: Types and Benefits
A trust is essentially a legal arrangement where a person or entity is entrusted with holding property for the benefit of designated beneficiaries. This obligation is imposed to ensure that the beneficiaries’ interests are protected. Trusts come in different shapes and sizes, each with its nuances and advantages. Fixed trusts, for example, provide beneficiaries with predetermined entitlements to income and assets. On the other hand, discretionary family trusts, often used for managing family assets or conducting a family business, grant trustees the discretion to determine distribution amounts and timing.
Moreover, the benefits of setting up a trust are numerous, encompassing:
Tax-efficient planning
Minimised conflict among beneficiaries
Flexibility in income distribution
Heightened protection for both family and significant investment assets, including business assets
But how is a trust created exactly? Let’s explore the key components.
When setting up a trust, it’s important to understand the process of Australia company formation to ensure proper legal structuring.
Key Components of a Trust
A trust isn’t merely an abstract concept; it’s a concrete structure built upon three crucial pillars: the trustee, the beneficiaries, and the trust deed. Each plays a unique role and comes with specific considerations.
We will now examine each component in detail.
Choosing a Trustee
The trustee is the backbone of a trust, responsible for its effective management and compliance with the relevant revenue authority. The choice of a trustee, therefore, is not to be taken lightly. It’s recommended to consider independent trustees to mitigate conflicts of interest and ensure impartial administration in the best interest of the beneficiaries. In this regard, critical qualities to look for in a trustee include:
Trustworthiness
Competence
Reliability
Communication skills
Integrity
Objectivity
Availability
The trustee’s role includes:
Supervising the administration and management of the trust’s assets
Handling investments
Disbursing income or assets to beneficiaries
Ensuring adherence to legal and tax obligations, including capital gains tax
Fulfilling their fiduciary duty while maintaining impartiality between beneficiaries
Complying with state or territory laws.
Identifying Beneficiaries
Beneficiaries are the raison d’être of a trust. They can be individuals, groups of individuals, or even organisations. Their selection is contingent upon the provisions outlined in the trust document and may involve predetermined entitlements or distributions as determined by the trustee. But how do you decide who to designate as a beneficiary?
When identifying beneficiaries, you should:
Think about primary and secondary beneficiaries
Clearly identify them and provide their contact details
Determine default beneficiaries
Understand tax implications
Evaluate who will ultimately benefit from the trust assets
Comply with laws and regulations
Beneficiaries have rights to a well-administered discretionary trust, the power to request information regarding its management, and the choice to request distributions.
Drafting a Trust Deed
The trust deed is the constitution of a trust. It’s a formal legal document that outlines the regulations of the trust fund and the trustee’s authority and responsibilities. It should incorporate the following:
The settlor
Trustee(s)
Beneficiaries
Trust property
Terms and objectives of the trust
Powers and responsibilities of the trustee
Conditions and rules of the trust
This critical document must be drafted by a qualified professional such as a lawyer or solicitor. While the legal expenses for establishing a standard family trust can be under $1,000, this amount may increase if customised trust provisions are necessary.
Now that we’ve covered the key components of a trust, how do you go about setting one up?
When setting up a trust, it’s also worth considering the advantages of an offshore company set up to diversify and protect your assets.
Setting Up a Trust: A Step-by-Step Guide
While establishing a trust might seem complex, it can be a smooth process with the correct guidance. We will guide you through the steps, from the initial planning to the operation of your trust’s bank account.
Initial Planning and Consultation
Before embarking on the journey of setting up a trust, it is imperative to consult professionals, especially when there are significant investment assets involved. Seeking professional advice will help in determining whether a trust fits your needs and in understanding aspects like tax implications and the protection of assets. Trust lawyers and property investment professionals are well-suited to provide this consultation.
Before establishing a family trust, it’s important to consider factors such as tax implications and asset protection. These considerations play a significant role in shaping the trust’s structure and operations, ensuring that it aligns with the specific financial goals and requirements. The advantage of professional advice is that it can customise the trust to address your unique concerns, including aspects such as asset protection, wealth distribution, and tax implications.
Registering Your Trust
Once the trust has been planned and the trust deed drafted, it’s time to register your trust. To set up a trust in Australia, you will need to obtain an Australian Business Number (ABN) and a Tax File Number (TFN). These identifiers are necessary for setting up a trust because the TFN is used for tax return submissions, and the ABN is essential if the trust engages in business activities.
The formal steps for registering a trust in Australia involve:
Selecting trustees
Determining beneficiaries
Creating a trust deed
Registering the trust for an ABN if it engages in enterprise activities
The trustee then handles the administration of the trust’s tax responsibilities. To obtain an ABN for a trust, the trustee is required to submit an application through the Australian Business Register. This process can take up to 28 days, which allows for the completion of necessary steps and any additional manual checks to be conducted.
Paying Stamp Duty and Other Fees
After you’ve registered your trust, it’s time to take care of the financial aspects, including paying stamp duty and other associated fees. Here are some key points to keep in mind:
Stamp duty is a charge that may be required upon the establishment of a family trust in Australia.
The applicability of stamp duty varies based on the state.
The stamp duty rates differ based on the state, and exemptions and reductions may apply in certain scenarios.
In addition to stamp duty, you should anticipate incurring fees that can range from $160 to $5000, depending on the location and structure. Plus, there will be costs associated with the deed and ongoing maintenance fees. Make sure to budget these costs into your financial plan.
Opening a Trust Bank Account
Following the establishment of the trust, you’ll need to open a bank account under the trustee’s name specifically for the trust. This step ensures the trust has its designated account for handling its assets. Managing the trust’s finances necessitates fulfilment of certain prerequisites like identification documents for all trustees and beneficiaries, trust documents, and proof of address. Some banks may also mandate that the trust has an ABN.
Once you’ve gathered all the necessary documents, the process of opening a trust bank account can be completed in a few hours at a branch. With this last step, your trust is up and running.
When setting up a trust, it’s essential to understand the requirements for obtaining a business license in Australia to ensure full compliance with local regulations.
Managing a Trust: Ongoing Responsibilities and Compliance
The process of setting up a trust constitutes just the beginning of the journey. The continuous management of a trust entails a range of responsibilities and compliance requirements. The trustee, for example, is tasked with several duties like:
Acting in good faith
Prioritising the best interest of the trust and its beneficiaries
Complying with the terms of the trust deed
Managing the trust’s assets attentively
Satisfying tax obligations.
Trustees must also distribute trust income to beneficiaries regularly, usually on an annual basis. This requires continuous accounting and tax guidance, with expenses commencing at $1,500 plus GST for uncomplicated holding trusts. Failing to meet these obligations can result in penalties ranging from $3,130 to $18,780, disqualification for trustees, and substantial tax penalties for the trust.
Tax Implications and Strategies
Tax is a critical consideration when setting up and managing a trust. A family trust can provide tax benefits to its beneficiaries by:
Distributing dividend income and capital gain income in a tax-effective manner to minimise tax liability
Allocating income among family members to take advantage of lower tax brackets
Making use of a capital gains concession if trust assets are sold after 12 months.
However, while a trust itself generally does not directly pay taxes, there are particular situations that can result in a tax obligation for the trust. Beneficiaries of a family trust are subject to taxation based on their personal tax rates, thus their tax liability is contingent upon their individual income bracket.
A family trust is also required to register for GST if the business operated through the trust yields an income exceeding $75,000 within a financial year.
Pros and Cons of Trusts
Like any financial tool, trusts come with their pros and cons. On the plus side, trusts provide for vulnerable family members, safeguard wealth for future generations, reduce the likelihood of inheritance disputes, and facilitate tax planning. However, trusts also come with drawbacks such as:
Complexity
High compliance costs
Potential limitations on trust lifespan
Inability to distribute losses among beneficiaries
Setup and administration costs
Moreover, the maximum duration of a trust in most Australian states is 80 years, and upon reaching the termination date, the assets must be distributed to beneficiaries, potentially leading to the loss of the asset protection benefits associated with the trust.
Trusts for Family Businesses: Special Considerations
Family businesses can greatly benefit from setting up a trust for tax and management purposes. However, this requires careful planning and professional advice. For instance, understanding the benefits of appointing a company as a trustee can combine the limited liability advantages of a company structure with the tax flexibility advantages of a family trust.
The influence of a trust on the management of a family business is significant. It:
Fosters trust
Enhances governance
Provides a structured framework for decision-making and ownership
Prevents conflicts
Helps to maintain a positive business reputation
Seeking professional advice will ensure that your family business trust, as a separate legal entity, is set up correctly and efficiently.
Interested to know more about unit trusts? Learn the difference between Unit Trust vs Discretionary Trust here!
Summary
Setting up a trust is a strategic move that offers myriad benefits, from safeguarding assets and managing family businesses to facilitating tax planning. However, it requires careful planning, professional advice, and diligent management. With the right guidance, you can navigate the labyrinth of trust establishment and management, ensuring a secure future for your wealth and legacy.
Helpful Resources
You may be interested in reading
Frequently Asked Questions
How much does it cost to set up a trust Australia?
Establishing a family trust in Australia generally costs $1,500 (plus GST) with legal documentation or $2,500 (plus GST) with a corporate trustee, making it an affordable option for families.
What is required to set up a family trust?
Setting up a family trust is a complicated process which should be done with guidance from a lawyer. Specifically, you need to nominate trustees and beneficiaries, draft the trust deed, settle, sign and stamp the trust.
What is the benefit of setting up a trust in a will?
Setting up a trust in a will offers numerous benefits, such as protecting beneficiaries from creditors and litigants, providing ongoing support for beneficiaries, and allowing for more tax-effective estate planning.
What are reasons to not have a trust?
The major drawbacks of trusts are their irrevocability, the loss of control over assets, and their cost. A trust can be made revocable, but this generally has negative consequences such as higher tax, estate duty, asset protection, and stamp duty costs.
What is a trust, and why should I consider setting one up?
A trust is an obligation imposed on a person or entity to hold property for the benefit of beneficiaries, making it a versatile tool used for estate planning, investment, and business purposes. Setting up a trust can ensure that your assets are managed according to your wishes.
