Choosing the right trust that suits you and your family’s needs depends on numerous factors and it can be hard to know what types of trusts actually exist out there. We have made a list of the most common types of trust structures for business owners, families and individuals and describe exactly what each one does below.
Discretionary (Family) Trust
Family trusts are established to manage, protect, and pass on family assets including shares, personal property, and the family’s business from one generation to another.
Income and capital gains can be distributed at the trustee’s discretion to family member(s). This includes family members at lower marginal tax rates as a means for reducing tax obligations. They can also exclude income and capital payments to some family members if wanted or required.
A unit trust is a specific type of trust that divides the beneficial ownership of the trust property into units. It differs from a family (discretionary) trust in that trust property in the unit trust is held absolutely for the unitholder. Therefore, it does not give the trustee the discretion to distribute income or capital among unitholders. Distributions must be allocated in accordance with units held in trust.
There are numerous types of asset holding, licence, and service trusts that may be established for a business. But business trusts are essentially used to manage and protect that business from loss due to lawsuits filed by employees, clients, and creditors.
They’re also used to separate your personal assets from your business assets and to ensure family assets are out of reach in the event your business is sued or files for bankruptcy. Your business assets are also protected in the event you – personally – are sued.
Similar to family trusts, business profits can also be distributed tax effectively to reduce taxes and increase net business profit. Business trusts can further access small business tax concessions. In other words, if you sell your business, you could be exempt from capital gains tax. This could potentially save you tens – even hundreds of thousands – of dollars in taxes.
A business trust will commonly utilise either a discretionary (family) trust structure or a unit trust structure, depending on a variety of factors and what suits the nature of the business, as well as who(m), is running it.
A testamentary trust is established according to instructions in a will. So, it does not exist until the person making those provisions passes away.
Rather than the deceased person’s assets going directly to beneficiaries, the assets are held in trust on behalf of those beneficiaries. Funds are then distributed according to the deceased’s will.
A testamentary trust can protect the assets a beneficiary may receive in the event of bankruptcy, business lawsuit, or relationship breakdown. Unlike discretionary (family) trusts, minors receive the adult tax-free threshold of $18,200, which means you can tax-effectively distribute trust income and capital gains among children, increasing the net income after tax distribution to the family.
Hopefully, we have given you a better idea of what types of trusts are out there and which ones will best suit you and your needs.