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How Do Trusts Work? Family Trusts and Unit Trusts

Trusts are often the best way for a business owner to reduce risk and reduce tax burden.

Trusts date back to the 12th century in England during the time of the Crusades. When a landowner went off to fight in a crusade, they were the ‘Beneficiary’ of the Trust while the individual holding the land in the interim while they were on a crusade was the ‘Trustee’. We’ll explain these terms later on.

Trusts hold assets and are a legal relationship between individuals or entities. The conditions of a Trust are outlined in its Trust Deed.

Key Roles

Trustee

The Trustee is the legal owner of the assets of a Trust. Their role is to act in the best interests of the Beneficiary of the Trust. In short, the Trustee holds assets on behalf of the Beneficary.

A Trustee can be a person or company. Or a number of people or companies. This is where Trusts become highly customisable.

Beneficiary

The Beneficiary is the one who benefits from the assets of the Trust. A Trustee may decide to distribute assets from the Trust to a Beneficiary.

There are two types of Beneficiaries.

Primary Beneficiary

The Primary Beneficiary will ultimately benefit from the assets when the Trust is wound up at the end of its life.

The Trustee can name multiple individuals or companies to be the Primary Beneficiary.

General Beneficiaries

The General Beneficiaries are generally a broad class tied to a particular family group. They may include Universities, Charities, or other Companies or Trusts that the Beneficiaries otherwise might be involved with.

Appointor

The Appointor really has ultimate control over what is going on. The Appointor appoints the Trustee.

While you might have a particular person or company who has legal ownership of the assets as the Trustee, the Appointor decides who that Trustee is.

If there is a disagreement between the Appointor and the Trustee, the Appointor can just replace the Trustee.

Guardian

The Guardian’s role is to protect the interests of the Beneficiary and agree to distributions.

The two types of Trusts

Generally speaking there are two types of trusts.

However, it is important to note that all Trusts are different and are tailored to a specific situation. All lawyers have different Trust Deeds.

Family Trusts (otherwise known as Discretionary Trusts)

Family Trusts involve all of the individuals outlined above: Trustee, Beneficiary, Appointor and Guardian.

Family Trusts are catered to each specific circumstance. We have set up thousands of Family Trusts over our 20 years of operation and no two Family Trusts are the same.

In a family Trust the Trustee has maximum flexibility on the assets. This means that no particular person or company has the rights to any of them.

Family Trusts are great for asset protection.

Unit Trusts

A Unit Trust is a type of Trust where there are specific interests in the Trust in respect to the assets and liabilities.

In a Unit Trust, each person in the Trust has an outlined share of the capital and/or income of the Trust.

In a Unit Trust, some Beneficiaries may be entitled to income only while others may be entitled to capital only.

This is where you really need to cater it to your specific situation with the help of a professional.

Typically a Unit Trust has unit holders who are entitled to both capital and income.

Unit Trusts do not have an Appointor. Instead, you generally need a 75% resolution by the unit holders to remove the Trustee.

The Endless Hybrids

Because Trusts are customisable, different combinations of Unit Trusts and Family Trusts are available.

Your specific circumstances and goals will determine what combination is best for you.

Get in touch with us if you would like us to review your Trust structure.

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