The main objective of a trust is to make a clear distinction between the beneficial and legal ownership of assets. In essence, the legal ownership of an asset lies on the trustee. On the other hand, the beneficiaries may take advantage from the income generated from the assets.
Formally speak, a trust is not a legal entity, but is considered a legal relationship controlled by the trustee of a trust and in adherence to the terms and provisions inscribed into the trust deed.
Main Elements of a Family Trust
The trustee is the main regulator of a trust. A trustee may be an actual person or a group of individuals. It may also be an entity, such as a corporation.
A trustee carries the legal duty of administering the trust on behalf and for the benefit of the beneficiaries. Additionally, a fiduciary relationship should be done in good faith. Therefore, a trust may only act in accordance with the trust deed and related trust legislation. By rule, the trustee is the legal owner of the assets of a trust, but not necessarily the beneficial owner.
A trust is categorized as a discretionary trust when a trust carries absolute discretion on how the trust income and capital can be distributed among its beneficiaries.
A trust deed is a legal binding document signed by the trust creator, also known as the settlor. It is an important document that provides detailed instructions to a trustee on how a trust should be managed and what type of activities it may undertake. Additionally, a trust deed also enumerates the beneficiaries of a trust.
The appointor/s are natural persons that has the power to appoint and subsequently change the trustee of a trust. It is important that a discretionary trust always has a living appointor.
In most situations, every 30th of June each year, a trust must delineate the distributable income of a trust. A trustee must decide on how the distributable income of a trust is to be allocated among the beneficiaries. The distribution minute must include the distribution amounts and the nature of distributions, such as capital gains and franked distributions.
Beneficiaries are natural persons that benefit from the trust capital and income. Typically, a trust has primary beneficiaries that are specified in the trust, with the remaining beneficiaries related or has connections to the primary beneficiaries. A beneficiary of a trust may also be an entity, such as in the case of an organization or company.
Income that is distributed to adult beneficiaries and beneficiaries that are entities will be subject to tax. On the other hand, a trustee is assessed with tax on income allocated to child beneficiaries. The trustee is also assessed with tax at the top of marginal tax rate, in the case the income of the trust is not distributed to the named beneficiaries.
If you need expert assistance in making decisions regarding various aspects of a discretionary family trust, you can contact our Damalion experts to assist you every step of the way. Contact us today to learn more about trust income and more.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.