When to set up a trust fund

There is a perception amongst many that trust funds are only for the ultra-rich. However, there are situations where a trust could be suitable for those with a middle-class income. For example, an SMSF is a particular kind of trust, and other types of trusts may be well within your financial reach.

What is a trust?

Put simply; a trust is a way to protect assets and pass the benefits onto chosen beneficiaries, such as a spouse, children or entities such as charities. Essentially, assets you put in the trust become no longer your property, being managed by a trustee (nominated by you). Your trustee could be a bank, solicitor, or company set up for this purpose.

Why create a trust?

There are a few reasons you might consider setting up a trust. Doing so could be useful in estate planning. Though, unlike a will, you do not need to pass away for payments to be made to your beneficiaries.

You may wish to pass on assets to a loved one who isn’t as financially savvy as you, with stipulations as to how it may be used. For example; as a bursary for university or to start a business once they turn 25. This could mean instructing the trustee to pay a beneficiary on a monthly basis or with a lump sum, for say, a house deposit.

A trust is one way to ensure your money delivers it’s intended benefits, hopefully for generations to come. A trust can also be a way to protect personal assets from creditors, for example protecting the family home when starting a business venture. However, note that creating a trust when creditors are already seeking payment will likely have a court overturn that protection!

What can you place in a trust?

You can put cash, stock and real estate in a trust, along with other valuable assets. It’s up to you to discuss with your solicitor to decide what to include, who the beneficiaries will be and any stipulations.

What are the benefits of a trust?

With the proper planning, a trust can have a number of benefits. Because you no longer own the assets held in trust, you may not have to pay income tax on the income earned from them.

Those in a higher tax bracket may also be able to remove assets from their net worth to move into a lower tax bracket. It’s one reason why discretionary trusts are popular for tax planning and asset protection. Discretionary trusts also have low compliance, costing little to set up and have low administrative work.

Another benefit with a discretionary trust is that income is taxed in relation to the beneficiaries, not the trustee. The choice in distribution means the option to choose those with the lowest tax rate. This including to exempt charities, effectively as pre-tax income.

For asset protection purposes, family trusts are highly secure. However, note there are circumstances relating to the Bankruptcy Act, the Family Court Act and Centrelink family tax benefits where this is not ironclad.

What are the drawbacks of a trust?

Many trusts are irrevocable, so you can’t dissolve the fund later, as the assets are no longer yours.

Setting up a trust may come with high fees. It needs to be crafted by a highly specialised solicitor to make sure it’s as tax-efficient as possible.

Unlike companies, trusts cannot accumulate income. Instead, a trustee must distribute the income to the beneficiaries each year, even if only on paper.

Loses on negatively geared property cannot be taken out of a trust, or offset against personal income.

A final note

There are more than 40 varieties of trusts in Australia. Before setting up a trust, ensure you speak with your TWD adviser to discuss the financial and tax implications. If you’re in need of a trust solicitor, we’re able to connect you to an established professional.