Trusts Flashcards
Trusts:
Trusts are widely used for investment and business purposes.
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.
The trustee is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.
Beneficiaries (except some minors and non-residents) include their share of the trust’s net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates and super funds.
Trustees
The trustee(s) (there may be more than one) of a trust may be a person or a company (the latter is known as a corporate trustee). In either case, the trustee must be legally capable of holding trust property in their own right. The trustee holds the trust property for the benefit of the beneficiaries.
Generally, the beneficiaries are taxed on the net income of a trust based on their share of the trust’s income – regardless of when or whether the income is actually paid to them.
Advantages of an Individual Trustee
The main advantages of having an individual trustee are the:
- low set-up and management costs; and
- relatively simple set up.
Disadvantages of an Individual Trustee
However, there are some disadvantages of having an individual trustee, including that:
- the individual trustee could be responsible for any legal issues with the trust;
- it may be difficult to distinguish between the trustee’s personal assets and the trust’s assets; and
- the trust’s assets will need to be transferred to another entity if the individual trustee dies.
A corporate trustee is a company that acts as trustee of a trust. The company is a registered company, much like any other company. However, it is often incorporated with the sole purpose of acting as trustee, meaning that the company will not conduct business. Like any other company, the corporate trustee has shareholders and directors. Ultimately, it is the directors of the corporate trustee who control the trustee (the company) and consequently control the distributions of the trust.
Advantages of a Corporate Trustee
- Limited liability for individuals: Since the company is a separate legal entity, individuals gain the advantage of limited liability. This means that if there are any legal issues with the trust, the company is legally responsible, not the directors that are controlling it.
- Easier separation of trust assets: it is relatively straightforward to distinguish which of a person’s assets are part of the trust.
- Greater asset protection
- Simpler succession: If something happens to one of its directors, the corporate trustee must simply replace its director. The title to the assets would not change, so the trust’s assets do not need to be transferred in the case of the death of a director.
Disadvantages of a Corporate Trustee
- additional set-up costs; and
- maintaining records for the entity.
A trust is not a separate legal entity — it is a relationship between the trustee and beneficiaries. Consistent with a trust not being a separate legal entity, a trust is also not a separate taxable entity.
If there is some part of the net income not assessed to a beneficiary (or the trustee on their behalf), it may be assessed to the trustee.
Where there is a tax loss, it cannot be allocated to the beneficiaries, but is trapped in the trust. It may, however be carried forward and be taken into account in working out the net income of the trust in a later year.
Advantages of a trust
From a tax perspective, the main advantage is that any income generated by the trust from business activities and investments, including capital gains can be distributed to beneficiaries in lower tax brackets (often spouses or children)
Holding assets in a family trust can also assist in avoiding challenges to a Will since any assets held in the family trust will not form part of a deceased estate.
from an asset protection perspective, assets held in a family trust cannot be attacked by creditors or lawsuits so they are ideal for protecting assets from business or personal disputes and they can also facilitate the transfer of assets from generation to generation tax free.
