Last editedJune 20213 min read
Passing on your assets to loved ones sometimes requires something more complex than a standard will, like a trust fund – but what is a trust fund, and should you consider one? Read on to find out how these investment structures could be the best solution to your financial concerns.
What is a trust fund?
A trust fund is a financial tool that is used to place assets into an account to be held by another person, so it’s intended to benefit people other than the original owner. In short, instead of going from owner to beneficiary, money/assets go from owner to the trust fund, and then to the beneficiary at an agreed time. It’s like a middle-step within the inheritance process.
Trust funds can hold several different kinds of assets, including stocks, cash, real estate, and even items of high value like antiques or fine art. As mentioned, there are several parties involved in setting up a trust fund:
Settlors: The person/persons who establishes the trust
Trustees: The person/persons who manage the trust fund and eventually distribute its assets
Beneficiaries: The person/persons who receives the assets from the trust
Types of trusts in Australia
There is more than one type of trust fund Australia recognises and allows to be used:
1. Family trusts
Also known as discretionary trusts, these are the most common types of trusts in Australia. They’re best utilised by families with businesses or assets that need to be distributed in a more flexible manner than simply one lump sum. A trust allows assets to be distributed in set amounts at a set time, making them a far better option than traditional inheritance in regards to tax.
2. Fixed trusts/Unit trusts
A fixed trust, or unit trust, removes the option to determine precisely when assets are distributed. Instead, assets are split into units, and unit holders are given their distribution at the end of each year. This is a similar concept to shareholders gaining their portion of company dividends. So, if a trust fund is split into 100 units, there could be 100 separate unit-holders, or there could be simply two, each with 50 units.
3. Testimony trusts
A testimony trust fund is a trust that is set up after the death of an individual, following the terms of their will. These are often used in the cases of parents dying while their children are still too young to manage finances. According to the will, and actioned by the trustee, assets may be released to assist with education, but the assets will not be fully released to the children until they are legal adults.
4. Special disability trusts
Also called an SDT, a special disability trust is one of the more specialised types of trusts in Australia. Used to help cover the costs of care for someone with a severe disability, SDT trusts in Australia must be verified by Services Australia.
5. Charitable trusts
Charitable trusts distribute assets to elected charities every year until they are depleted.
Setting up a trust
It is relatively straightforward to set up trusts in Australia. In some cases, they can be DIY affairs taken care of entirely online for a small fee and the cost of stamp duty.
1. Decide on which assets you want to place in the trust fund
Choose what you want to place in your fund. Ensure that you list the value of the specific assets.
2. Choose a trustee
A trustee can be anyone you choose, but it’s best to consider an independent trustee to ensure fairness and prevent conflict of interest.
3. Choose your beneficiaries
Decide who will receive the contents of your trust fund. You should also say how much they should each receive as a set amount or as a percentage. You can leave this to the trustee’s discretion if you wish.
4. Create a trust deed
All trust funds in Australia must have a trust deed. This is a legal document that sets out the rules of your trust, such as the powers the trustee has. Without a deed, setting up a trust is impossible. You should turn to a professional to ensure you take this step correctly.
5. Settle and sign the trust
A settlor must sign the trust to create the trust deed. Everyone listed as a trustee must also sign.
6. Pay stamp duty
Depending on where you make your trust fund, Australia state stamp duty may apply. If your state does this, make sure you allow yourself enough time to meet payment terms.
7. ABN and TFN
An ABN (Australian Business Number) and Tax File Number (TFN) will be needed. You should definitely seek professional help if this stage seems overwhelming.
8. Open a bank account
This should be done in the name of the trustee “as a trustee of the trust”, meaning the trust fund is now up and running.
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