Liability is limited by a Scheme approved under Professional Standards Legislation.
Essential features of a Trust
There must be 3 aspects to a trust to ensure certainty:
There must be an intention to create a trust. This intention should be included in very specific terms in the document that establishes the trust.
2. Subject matter
There must be certainty as to the subject matter of the trust, and “a settlement sum” by the Settlor usually gives rise to that certainty in relation to the establishment of the trust.
The trust must nominate persons who are beneficiaries. In the case of a family discretionary trust, a class of beneficiaries are usually nominated and in the case of a unit trust, the specific names of the unitholders.
Types of trusts
In the case of a fixed trust, the beneficiaries are set or “fixed”. The proportion of the trust benefits to be received by each beneficiary will also be fixed.
For example, if beneficiaries of a trust are named as A and B, and each are to receive 50% of the trust assets, the trustee has no choice as to who will receive the benefits of the trust.
Fixed trusts are less flexible than other types of trusts and therefore less likely to be able to meet the future needs of beneficiaries.
Family Discretionary Trust
In the case of a discretionary trust, the beneficiaries are set however, the trustee has a choice as to how the benefits of the trust will be distributed between them.
In other words, the trustee has the right to distribute the annual trust income at the trustee’s absolute discretion. The decision as to who is to receive the trust income is usually made by the trustee at the end of each financial year.
A discretionary trust is more flexible that a fixed trust and is therefore more likely to meet the beneficiaries changing needs.
In a Unit Trust, entitlement to the benefits of the trusts is divided into units similar to shares in a company. The units are held by individual unit holders in the trust.
Whereas the beneficiary of a fixed trust or discretionary trust can not sell or transfer their interests in the trust, a unit holder has the right to sell or transfer the units.
A hybrid trust has is a combination of fixed, discretionary and unit trusts.
For example, a discretionary unit trust provides both a flexible arrangement for distributing the benefits of the trust and the ability to provide a beneficiary with an interest which can be bought, sold or transferred.
A superannuation fund is a form of limited discretionary trust. However, the administration requirements and tax treatment of complying superannuation funds is regulated very differently from other types of trusts. Rather than relevant state legislation applying, the governing legislation for superannuation funds is the Superannuation Industry (Supervision) Act 1993.
For example, a self-managed superannuation fund is required to meet the following conditions: -
1. Have fewer than 5 members;
2. Each individual trustee of the fund is required to be a fund member;
3. Each member of the fund is required to be a trustee;
4. No member of the fund can be an employee of another member of the fund, unless those members are related; and
5. No trustee of the fund is allowed to receive remuneration for services as trustee.
6. Where the trustee is a company, each director of the company must be a member of the fund and each member of the fund must be a director of the company.
Who is the Settlor?
The Settlor is the person who legally creates the trust. The Settlor gives the trustee a settlement sum to be held on trust for the beneficiaries of the trust.
The Settlor should be independent to the trustee and beneficiaries. A Settlor can never be a beneficiary of a trust.
After settlement of the trust, the Settlor should have no further involvement with the trust beyond settlement date.
Who are the Beneficiaries?
The beneficiaries of a trust are the nominated persons, companies and/or other legal entities who are to receive the benefits under the terms of the trust document.
The beneficiaries must be described with certainty in the trust document.
Who is the Trustee? The trustee is the principal of the trust and can be an individual or legal entity such as a company
For example, the trustee may be: -
1. A beneficiary of the trust;
2. A company controlled by a beneficiary;
3. An interested individual such as a relative of a beneficiary;
4. An independent individual who has no direct or indirect interest in the trust assets;
5. A professional advisor such as a solicitor, accountant or financial planner; or
6. A registered trustee company.
Who is the Appointor ?
The Appointor is usually and individual appointed in a Family Discretionary Trust who has the right to “hire and fire” the Trustee. The Appointor is usually a primary beneficiary who has the ability to indirectly control the trust. Provision needs to be made in the trust deed to provide for future control of the trust following the death of the Appointor.
Limited liability protection
Some trusts have the ability to quarantine the trust assets from personal liabilities.
In the case of discretionary trusts, limited liability protection can be offered, however, limited liability will not extend to: -
1. Loans made to the trust and not subsequently gifted to the trust or repaid to or forgiven by, the Lender;
2. Trust income or capital that has already been allocated to a beneficiary;
3. Trust assets that have been pledged as security or guaranteed to a creditor; and
4. Gifts that have been made to the trust within any bankruptcy “clawback” period that is applicable to the donor.
Unit trusts and most fixed trusts are unlikely to offer limited liability protection unless the units are held by the trustee of a discretionary trust.
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