Non-registered (Private) Trust Information

Discretionary trusts are separate legal entities used for purposes of asset, privacy and income protection.

A trust is an equitable obligation binding a person or company (the “Trustee”) to deal with property over which he/it has control (called the “Trust Property”) for the benefit of named beneficiaries or classes of beneficiaries (called “Beneficiaries”). Ownership of property is vested in the Trust on behalf of another party/ies for purposes of asset and privacy protection. The obligation relates to the Trust Property and requires the Trustee to exercise control over the Trust Property for the benefit of the Beneficiaries. A discretionary trust empowers the Trustee to determine the distribution of income and capital of the Trust. This discretion usually relates to whether income or a certain type of income will or may be distributed and to whom it will or may be distributed for purposes of legally minimising taxation obligations for one or more parties named in the Trust.

A Discretionary Trust ‘Deed’ is the formal and legal instrument that documents the formal and legal arrangements and obligations between the parties within it and most often contains the following features:

It is established by a Settlor, that is, the person or entity who formally settles or creates the Trust by the payment of a nominal sum to the Trustee which constitutes the initial Trust Property.

The terms of the Trust are contained in a deed executed by the Settlor and the Trustee called the Trust Deed.

The Trustee may be a limited liability company established for this purpose. The Trustee is vested with a discretion to allocate income or capital (as the case may be) to all or any of the specified Beneficiaries referred to in the Trust Deed, or to accumulate the income; and a wide range of powers to address a variety of situations and transactions.

The Beneficiaries may be entitled to both capital and income distributions with a number of defined classes of persons which typically include parents, children and grandchildren, spouses of children and grandchildren and more generally, any company, trust, religious or charitable institution in which any of the beneficiaries have a beneficial interest. These Beneficiaries are categorised into 3 classes. These are Primary, Secondary and Tertiary Beneficiaries. Each class has different expectations or rights to receive distributions.

For legal reasons, a Trust must terminate and does so on a date known as the “vesting date”. The vesting date is the earlier of the date of expiration of a period of eighty years from the date of execution of the Trust Deed or twenty years after the death of the last survivor, now living, of the descendants of Her Majesty Queen Elizabeth II. A Trust may also be wound up at an earlier date. There is a formal legal process that must be undertaken to do so.

By reason a Trust’s lifespan is eighty years, when any key title/office holder pass away, the integrity of the Trust and its estate remain intact such that it protects the estate from being dispersed as a result of having to meet any financial obligations arising from the death of the title/office holder. The Trust may be the source of the expression “the rich get richer while the poor get poorer”.

The Trust Property may be classified as either “income” or “capital” and may be split into a variety of categories so as to most effectively minimise each of the Trustee’s and Beneficiaries’ tax liability.

The Settlor should be an independent person or entity who should not be either a Beneficiary; or a Trustee. The Settlor contributes a nominal sum to establish the Trust (usually $10.00). The payment of the settlement sum should be recorded in the books of the Trust and be the first amount deposited into the new bank account established for the Trust. This amount is never repaid to the Settlor.

It may be desirable that the Trustee be a company. One of the major attractions in using a corporate Trustee is that the liability of each shareholder is limited to the value of their own shares. In regard to trusts, a Trustee is personally liable for any debts or liabilities it incurs in the course of carrying on a business for the Trust. The Trustee does, however, hold a right of indemnity from the Trust Property to satisfy liabilities incurred in its capacity as Trustee. Establishing a corporate Trustee provides a mechanism to limit such liability.

The shareholders of the company may also be Beneficiaries. If, at any time, the Trustee is to be replaced, a formal deed of appointment and retirement of the Trustee will be required.

The powers and discretions conferred upon the Trustee are extensive.

There are different classes of Beneficiaries known as Primary, Secondary or Tertiary Beneficiaries. Careful consideration should be made as to who you wish to be placed in each of these classes as the decision effects many parameters such as taxation, wills, obligations of office etc.

Normally, the Primary Beneficiaries are those persons who you wish to specifically name as Beneficiaries. The Secondary Beneficiaries may include their spouses, parents, nephews, nieces, children and grandchildren. Tertiary Beneficiaries are a step more remote and include such things as related companies etc.

A Trust Deed: provides that the Trustee must distribute any Income in default of a determination or allocation of the income by the Trustee in any year; and

provides for the distribution of the capital of the Trust to a certain class of Beneficiary if the Trustee does not make an allocation of all the capital of the Trust before the Trust terminates. Among other things, this prevents the Trust Property passing to the Settlor should the discretion not be exercised.

The Principal is the person or entity who effectively controls the Trust. The Principal may or may not be a Trustee but has the power to appoint and remove the Trustee/s and, therefore, indirectly controls who makes decisions concerning the Trust. The Principal has the power to remove the Trustee and appoint a new Trustee of his choice. Should the Principal die or become liable to be dealt with under any law relating to mental health then this power can be exercised by his personal representatives. If the Principal becomes bankrupt or if the Principal is a company and has a receiver appointed, is wound up or is placed into liquidation, then that Principal is automatically removed, and the Beneficiaries have the power to appoint a new principal.

A private discretionary trust can provide a great deal of flexibility in terms of the amount and/or character of distributions of income.

Accordingly, it is a tool which provides an opportunity to minimise the overall income tax payable. As a bonus, a properly structured and administered trust is likely to provide a practical solution to the trade-off between the risks of engagement in commerce and the need for protection of assets, privacy and income.

Differences Between a Private and a Public Trust

1. Public trust has tax obligations, must submit annual returns, a private (non-registered) trust does not.

2. Public trust has audit obligations, must report to appropriate “authorities”, a private trust does not.

3. Public trust is registered (corporate affairs, tax office), a private trust is not.

4. Public trust is a legal structure, a private trust is not (lawful structure).

5. Public trust can borrow currency (money), private trust cannot, but the trustee can on behalf of the trust using same property title as security.

6. Public trust can be litigated against and it may litigate in its own right, a private trust cannot.

7. Public trust is subject to Corporations Act, and State and Federal laws, private trust is not and cannot.

8. Public trust’s deed is regulated by the Corporations Act 2001 and the deed is subject to the tax acts, private trust is not.

9. Public trust’s deed is public by reason it;

a) refers to statutes and acts, as well as uses public copyright words, words that are copyright property of the owner and any “users” of those words implies an owner of the user, private trust deed bears only private words, being a sanitized deed, and structured for private use only, and

b) is registered, with an ABN & Tax File Number.

10. Public trust must disburse its income attained during the course of each year at the end of each year, being mandatory, a private trust does not.

Brief overview of differences between a private trust and a foundation

1. Structure of entity: a trust (structure) comprises of trustee/s (with administrative role) and beneficiary/ies (no active role but has the beneficial interest in the assets of the trust estate), whereas a foundation (entity) comprises principal participant/s that act essentially as agents, employees or volunteers. Both forms may appoint agents or volunteers of the structure, entity or employees. Both may conduct business privately.

2. By reason the trustee and the settlor are registered entities (birth certificate name or trustee company), the private trust is able to hold title (such as real estate title) on behalf of other parties (beneficiary/ies) that have beneficial interest in the estate.

A foundation cannot hold title/s as no registered party is affixed/connected to it.

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