It’s likely you’ve heard of a ‘trust’. It’s a complicated area of law, with many different types of trusts. Some trusts contain conditions, whereas others have an unlimited discretion. This article will break down what a trust is, and elaborate on the difference between unit and family trusts.
What is a trust?
Firstly, it is important to understand the definitions behind the terms. A trust is a complex entity, often misunderstood by the general public. Below, we’ll break down the key terms that arise in a trust agreement.
Trustee
The party that holds the property for the benefit of the beneficiary, is the trustee. They are entrusted with the property, hence, the name trustee. There is no limit to the number of trustees. Furthermore, trustees must act in the best interests of the beneficiary, always be impartial, and do their best to preserve the trust property.
Beneficiary
This is the party that receives the benefit of the trust. Beneficiaries may be numerous. If the trustee breaches their duties, legal remedies are available.
Trust property
This is the subject of the trust agreement and the reason the trust is created. The property doesn’t have to be land – it can be any form of asset, such as money or securities. The beneficiary receives the trust property.
Trust deed
This is the deed that establishes the trust, and outlines its conditions.
What’s a unit trust?
Unit trusts are a form of fixed express trusts. Thus, each beneficiary is allocated a fixed unit of the trust property, that they are entitled to receive. For example, the trust agreement may outline that, for the property of 123 Fake Street;
- Amber receives 50% shares.
- Callum receives 25% shares.
- Isobel receives 25% shares.
The beneficiaries are unable to alter the decision outlined in the agreement. The trustee has outlined the allocation, and thus, it can’t be changed.
What’s a family trust?
A family trust is a form of discretionary trust which is used to hold assets, or run a business. A family member establishes it in their lifetime, generally for asset management or for tax purposes.
Family trusts are useful for protecting beneficiaries who may be at risk of bankruptcy, or who have irresponsible spending habits. Accordingly, the trustee determines which beneficiary to distribute income or assets to in a manner they choose. It may also provide tax benefits, as the trust doesn’t have to pay income tax on income distributed to beneficiaries.
In short, the trustee has discretion in what is allocated to beneficiaries. They determine which assets may be allocated and how much may be allocated. Further, they determine which beneficiary may receive the assets.
Are there any disadvantages to family trusts?
Naturally, there will be disadvantages that can occur with family trusts. These include;
- The trust can’t allocate tax losses to beneficiaries.
- There are costs to the establishment and maintenance of the trust.
- Issues with the trust arise in family disputes.
- Any income earned by the trust, but not distributed, is taxed at the top bracket.
So what’s the real difference?
The trust agreement in a unit trust clearly outlines how the assets are divided, and this is unable to be changed. Furthermore, it has a limited duration, and involves very little discretion.
On the other hand, a family trust lasts longer, and is often passed through generations. Moreover, it is the trustees discretion as to the allocation of resources, often based on the current context and the purpose of the trust.
Final thoughts
In conclusion, trusts are complex legal agreements that can have a significant effect on one’s life. Understanding the difference between trusts is crucial to ensuring that you make the best decision. An estate planning lawyer will be able to assist you with any enquiries on the issue of trusts.
