Understanding Different Types of Trusts

Trusts are used by people as a means to run a business, plan their finances, provide for the future of their families, or to invest. In plain terms, a trust allows a person or company (called a trustee) to hold property or assets on behalf of another person or persons (called the beneficiary). Trusts can be of different types, and if you plan on having one, you will need to identify which type of trust will serve achieve your objectives.

Types of Trusts
In Australia, there are several different kinds of trusts. Some of them are:

  • Discretionary Family Trust
    A discretionary family trust is used to conduct family businesses or hold the family assets or estate. In this type of trust, trustees retain a discretion in allocating trust income or capital to the trust beneficiaries. A discretionary family trust provides a trustee with flexibility to allocate income in a tax-effective manner. They can also be used to protect assets from creditors, and can be adapted to meet the changing needs of a family or family business.
  • Fixed Trust
    A fixed trust differs from a discretionary trust in that a beneficiary’s interest under this type of trust are fixed. That is to say, trust income and capital must be allocated by a trustee in accordance with the beneficiaries’ fixed entitlements. Whilst a fixed trust does not afford the same level of asset protection as a discretionary trust, fixed trusts can be effective investment vehicles.
  • Unit Trust
    A unit trust is type of fixed trust, whereby the beneficiaries’ interest in the trust are unitised. Beneficiaries of unit trusts are typically referred to as “unit holders”. Units can confer on a unit holder a right to income, to capital or to both. Unit trusts can also be effective investment structures.

When considering the use of a trust, it is important to take into account the potential tax consequences that may arise at both the state and federal level. For example, discretionary trusts that allow foreign persons – a discretionary trust foreign beneficiary – to benefit from the trust may be liable to pay foreign person duty surcharge depending on the state in which the trust is based or owns property.

Whilst trusts are effective vehicles for running a business, family and financial planning, and investment purposes, given the complex nature of trusts and the tax consequences that arise from their use, it may be best to seek legal advice if you are planning on establishing one.

Talk to our experts at PG Peter Gell Legal if you need a Sydney law firm for matters of this nature.

Peter Gell

Peter was admitted as a solicitor in 1981 and holds qualifications in law and a Masters degree in taxation conferred by the University of NSW. Peter practises in taxation advisory, estate planning and wills, probate and commercial law.