Setting Up a Trust: Protecting Your Assets

• DJ Grigg
• 02/09/2024

Protecting Your Assets: Benefits of Setting up a Trust in Australia

Are you looking for a way to protect your assets and ensure your loved ones are taken care of in the future? Setting up a trust could be the answer. In Australia, trusts have become increasingly popular as a legal and financial tool for asset protection and estate planning.

One of the key benefits of setting up a trust is that it provides a high level of control and flexibility over your assets. Depending on the type of trust you choose, you can specify how and when your assets are distributed, designate specific beneficiaries, and possibly even protect assets from divorce or bankruptcy proceedings.

In this article, we will delve into the various benefits of setting up a trust in Australia and how it can help safeguard your hard-earned assets for future generations. Whether you’re a business owner, a high-net-worth individual, or simply want to protect your family’s inheritance, a trust can offer you peace of mind and maximum asset protection.

What is a trust?

A trust is a legal entity that holds assets on behalf of beneficiaries. It is created when a settlor transfers assets to a trustee who then manages those assets according to the trust’s terms and conditions. The trustee’s role is to act in the best interest of the beneficiaries and ensure that the trust’s objectives are met.

There are two main types of trusts in Australia: discretionary trusts and unit trusts. Discretionary trusts, provide the trustee with discretion over how to distribute the trust’s income and capital among the beneficiaries. Family trusts usually fall into this category. This flexibility allows the trustee to adapt to changing circumstances and ensure the assets are used in the most tax-efficient manner.

On the other hand, unit trusts are more suitable for commercial purposes. In a unit trust, the beneficiaries hold units that represent their proportional interest in the trust’s assets. The income and capital gains generated by the trust are distributed to the unit holders based on their unit holdings.

The benefits of setting up a trust in Australia

Setting up a trust in Australia offers a range of benefits for asset protection and estate planning. Here are some key advantages:

 1. Asset protection

One of the main reasons individuals and business owners choose to set up a trust is to protect their assets from potential creditors. By transferring assets to a trust, they are no longer considered personal assets and are potentially shielded from legal claims, bankruptcy proceedings, or divorce settlements. This can be particularly beneficial for professionals, such as doctors or lawyers, who want to safeguard their personal assets from professional liabilities.

 2. Estate planning

A trust is an effective tool for estate planning as it allows you to specify how your assets will be distributed after your death. By creating a trust, you can ensure that your assets are passed on to your chosen beneficiaries according to your wishes. This can help avoid disputes among family members and provide for dependents who may not be able to manage their inheritance on their own.

 3. Tax advantages

Another significant advantage of setting up a trust in Australia is the potential tax benefits. By distributing income and capital gains to beneficiaries in lower tax brackets, you can minimise the overall tax liability. Additionally, certain types of trusts, such as testamentary trusts, may provide additional tax advantages, such as reduced capital gains tax or access to the small business capital gains tax concessions.

 4. Privacy and confidentiality

Unlike a will, which becomes a public document after probate, a trust allows for greater privacy and confidentiality. The terms and conditions of the trust, as well as the details of the assets held, remain private. This can be particularly important for high-net-worth individuals who value their privacy and want to keep their financial affairs out of the public domain.

Types of trusts in Australia

In Australia, there are several types of trusts that cater to different needs and objectives. Let’s explore some of the most common types:

 1. Discretionary trust

A discretionary trust, provides the trustee with the discretion to distribute income and capital among the beneficiaries. This flexibility allows the trustee to adapt to changing circumstances and make distributions based on the individual needs and tax positions of the beneficiaries. Discretionary trusts are commonly used for asset protection, tax planning, and estate planning purposes.

 2. Unit trust

A unit trust is a type of trust where the beneficiaries hold units that represent their proportional interest in the trust’s assets. The income and capital gains generated by the trust are distributed to the unit holders based on their unit holdings. Unit trusts are often used for commercial purposes, such as property investments, where investors can buy and sell units in the trust.

 3. Testamentary trust

A testamentary trust is created through a will and only comes into effect after the death of the testator. This type of trust allows the testator to control how their assets are distributed to their beneficiaries, even after their death. Testamentary trusts can offer tax advantages, asset protection, and flexibility in managing the inheritance of minor children or vulnerable beneficiaries.

 4. Hybrid trust

A hybrid trust combines features of both discretionary and unit trusts. It provides the flexibility of a discretionary trust in terms of income distribution, but also allows for fixed entitlements, similar to a unit trust. Hybrid trusts are often used for complex tax planning strategies, as they offer a high degree of flexibility and can be tailored to specific needs and objectives.

The process of setting up a trust in Australia

Setting up a trust in Australia involves several steps and considerations. Here is a general overview of the process:

 1. Determine the purpose and objectives of the trust

Before setting up a trust, it’s important to clearly define the purpose and objectives of the trust. Consider the assets you want to transfer, the beneficiaries you want to benefit, and any specific conditions or restrictions you want to impose on the trust.

 2. Choose the type of trust

Selecting the right type of trust is crucial as it will determine the level of control, flexibility, and tax advantages you can enjoy. Consult with a legal and financial advisor to determine which type of trust best suits your needs and objectives.

 3. Prepare the trust deed

The trust deed is a legal document that outlines the terms and conditions of the trust. It includes details such as the trustee’s powers and responsibilities, the beneficiaries’ entitlements, and the rules governing the distribution of income and capital. It is essential to have a well-drafted trust deed that reflects your intentions and complies with relevant laws and regulations.

 4. Transfer assets to the trust

Once the trust deed is prepared and executed, you will need to transfer the assets you want to include in the trust to the trustee. This may involve transferring property titles, shares, bank accounts, or any other assets you wish to protect or pass on to your beneficiaries.

 5. Register the trust (if required)

In some cases, you may need to register the trust with the relevant authorities. These authorities include the Australian Securities and Investments Commission (ASIC) or the Australian Taxation Office (ATO). This requirement depends on the type of trust and the nature of the assets held. Seek professional advice to ensure compliance with all necessary regulations.

 6. Manage and administer the trust

Once the trust is set up, it is essential to properly manage and administer it. This includes keeping accurate records, lodging tax returns, and fulfilling the trustee’s duties and obligations. It is advisable to engage the services of a professional trustee. Also, seek legal and financial advice to ensure compliance with all legal and administrative requirements.

Key considerations when setting up a trust

When setting up a trust in Australia, it is important to consider the following key factors:

 1. Professional advice

Seeking professional advice from a legal and financial advisor is crucial when setting up a trust. They can guide you through the process, help you choose the right type of trust, and ensure compliance with all legal and tax requirements.

 2. Costs

Setting up and administering a trust may involve various costs, such as legal fees, accounting fees, and ongoing administrative costs. It is important to understand these costs and factor them into your decision-making process.

 3. Trustee selection

Choosing the right trustee is essential as they will have significant control and responsibility over the trust’s assets. Consider their expertise, integrity, and ability to fulfill their duties diligently. You may also consider appointing a professional trustee, such as a corporate trustee, for added expertise and peace of mind.

 4. Succession planning

When setting up a trust, it is important to consider succession planning. Think about who will take over as trustee in the future and how the trust will be managed when you are no longer able to fulfill the role. This can help ensure the smooth transition of assets and the continuity of the trust’s objectives.

 5. Regular review

It is advisable to review your trust regularly, especially when there are significant changes in your personal or financial circumstances. This can help ensure that the trust continues to meet your objectives and remains compliant with any changes in laws and regulations.

Protecting your assets with a trust

Setting up a trust in Australia can provide you with a robust framework for protecting your assets. This ensures their efficient management and distribution. Whether you’re a business owner looking to shield your personal assets, a high-net-worth individual planning your estate, or simply want to safeguard your family’s inheritance, a trust offers a range of benefits.

By transferring your assets to a trust, you might be able to protect them from potential creditors, minimise estate taxes, and maintain a high level of control and flexibility over their management. Additionally, a trust can provide privacy and confidentiality, ensure a smooth transition of wealth to future generations, and offer tax advantages.

However, it is important to seek professional advice and carefully consider all aspects before setting up a trust. Each individual’s circumstances and objectives are unique, and a tailored approach is essential to maximise the benefits of a trust structure.

Tax advantages of setting up a trust in Australia

One of the significant advantages of setting up a trust in Australia is the potential tax benefits it can offer. By distributing income and capital gains to beneficiaries in lower tax brackets, you can minimise the overall tax liability. Let’s explore some of the key tax advantages of setting up a trust:

 1. Income splitting

A trust allows for income splitting, which means distributing income to beneficiaries who are in lower tax brackets. This can help minimise the overall tax liability as the income is taxed at the beneficiaries’ individual rates. By directing income to family members with lower incomes, you can effectively reduce the overall tax burden.

 2. Capital gains tax concessions

Certain types of trusts, such as testamentary trusts or special disability trusts, may qualify for capital gains tax (CGT) concessions. These concessions can significantly reduce the tax payable on capital gains generated by the trust. For example, testamentary trusts can benefit from CGT exemptions on assets acquired by the trust after the death of the testator.

 3. Small business concessions

If your trust operates a small business, it may be eligible for small business concessions, which can provide additional tax advantages. These concessions include the small business capital gains tax (CGT) concessions, which can reduce or eliminate CGT on the sale of eligible business assets. Other concessions, such as the small business income tax offset or the simplified trading stock rules, can also help reduce the tax burden.

 4. Loss utilisation

In a trust structure, losses can be carried forward and offset against future income. This means that if the trust incurs a loss in one year, it can be offset against future income, reducing the overall tax liability. This can be particularly beneficial for businesses or investments that may experience fluctuations in income from year to year.

It is important to note that the tax advantages of setting up a trust can vary depending on the type of trust, the nature of the assets, and the individual circumstances. Seeking professional advice from a tax specialist or accountant is essential to understand the specific tax implications and benefits of a trust structure.

Trustee responsibilities and obligations

As a trustee, you have important responsibilities and obligations towards the trust and its beneficiaries. Here are some key trustee duties:

 1. Duty of loyalty

As a trustee, your primary duty is to act in the best interest of the beneficiaries and the trust. This means prioritizing their interests above your own and avoiding any conflicts of interest. You must make decisions that are fair, reasonable, and aligned with the objectives of the trust.

 2. Duty of care

You have a duty of care towards the trust’s assets and must exercise reasonable skill, care, and diligence in their management. This includes keeping accurate records, monitoring investments, and seeking professional advice when necessary. It is important to act prudently and responsibly to protect the trust’s assets.

 3. Duty to act impartially

As a trustee, you must act impartially towards all beneficiaries and avoid favouritism or discrimination. You should distribute income and capital in accordance with the trust’s terms and conditions and ensure fairness among the beneficiaries.

 4. Duty to keep proper records

As a trustee, you are responsible for keeping accurate and up-to-date records of the trust’s transactions, investments, and distributions. This includes maintaining financial statements, tax records, and any other relevant documentation. Proper record-keeping is crucial for transparency, accountability, and compliance with legal and tax requirements.

 5. Duty to communicate

You have a duty to keep the beneficiaries informed about the trust’s affairs, including its financial performance, investments, and any significant decisions or changes. Regular communication helps maintain trust and transparency and allows beneficiaries to understand and participate in the trust’s management.

It is important to note that being a trustee carries significant legal and fiduciary responsibilities. If you are unsure about your role or have concerns about fulfilling your obligations, it is advisable to seek professional advice or consider appointing a professional trustee.

Conclusion: Is a trust right for you?

A trust is a legal arrangement that allows a person (the settlor) to transfer their assets to a separate legal entity (the trustee) who then manages those assets for the benefit of the beneficiaries. By setting up a trust with proper administration and management to ensure its smooth operation and compliance with legal and tax requirements, you can protect your assets from creditors, minimise estate taxes, and ensure a smooth transition of wealth to your heirs.