What is a Family Trust?
A Trust can be described as many things and is often thought of as a device, or a vehicle for protection. Sometimes it’s helpful to think of a Trust as a concept and if I apply this analogy, I would liken a Trust to an aircraft, travelling overseas. The Captain and co-pilot and crew are charged with looking after the passengers and the cargo. Thus, the Captain and crew are the Trustees. The passengers are the Beneficiaries, and the cargo can be thought of as comprising the assets of the Trust.
A Family Trust is a whole lot more than simply a device or a concept. It is more a collection of relationships. The person creating the Trust (called the Settlor) has a relationship with the people they put in to run the Trust for them (called the Trustees). The people in charge of running the Trust also have a relationship but their relationship lies predominantly with the people the Trust has been set up for (called the Beneficiaries).
The Settlor places their faith in the Trustees to run the Trust in accordance with the rules they have laid down in the trust deed and the Beneficiaries place their trust in the Trustees to look after the assets of the Trust and to act in their best interests.
In legal speak, it has often been said that a Trust comprises a set of equitable obligations with the Trustees owing obligations to look after the property they have control of for the benefit of the Beneficiaries.
How Long Does A Family Trust Go On For?
How long do all these relationships go on for? Well that will depend.
First, the Trustees generally, in the ordinary course of events, will only owe an obligation to a Beneficiary whilst they are a Trustee. So as soon as they retire or resign as a Trustee, their obligations cease.
Secondly, all these relationships will come to an end when the Trust ends. When does this occur? In the first instance, it will be within 125 years of the Trust being set up because a Trust cannot exist for more than 125 years at law. But in some cases, a Trust is brought to an early end by the Trustees. This process is called ‘early vesting’ and it simply means bringing the date that is specified in the Trust deed forward. So, when this happens, all the relationships will cease as well.
Why Would You Even Want A Family Trust?
Lots has been written about the reasons why someone would want to set up a Trust but in the main, there are 4 motivations for creating a Trust:
Reason 1 – Asset Protection
When you move assets into the Trust, they may become protected against creditors, WINZ and other parties. But remember, if the documentation isn’t correct and if the transfer documents don’t contain those special Hawkins and entrenchment clauses we so often talk about, asset protection will indeed be threatened.
Reason 2 – Provision for Future Generations
Often a family will acquire assets and will want to ensure future generations can enjoy those assets. For example, you might buy a property and want your children and your grandchildren to be able to enjoy the benefit of this for years to come. One way of ensuring the asset is protected for future generations to use is by putting it in a Trust with specific Trust deed provisions so that the Trustees cannot sell the asset in future years.
Reason 3 – Tax Minimisation Trusts, if established correctly, can help you legally minimise your taxation liabilities. A caveat however applies. You must take specialised advice when setting up Trusts and other structures to ensure the structure is tailor-made to suit you and your circumstances. Reason 3 – Asset Testing Some government payments (rest home subsidies, for example) are means tested. And in Australia, the pension is means tested. Moving assets to a Trust means you will be asset poor, but you will have control over the assets that are held by the Trustees of your Trust. It may be that in the future that the government will change the rules on pensions or other government assistance, so moving your assets out of your control to benefit future generations makes sense.
Different Types Of Trustees
The Trustees run the Trust. Their primary responsibility is to the beneficiaries of the trust. It is recommended that when you set up a trust you choose “trustees” who understand your wishes and will carry them out.
An independent Trustee is recommended to ensure that your trust is depersonalised and the Trustees decisions are checked and agreed to by someone who is independent of the settlor(s) and the beneficiaries.
If your Independent Trustee is a “person” and that person resigns or dies then this can create some administrative work and cost as the Trust assets are legally held in the Trustees’ names. To change the ownership of many assets can be expensive.
So an option exists to use a company as the trustee. A Company lives forever, and so its role as a Trustee continues forever. A Company is managed by its Directors and the ultimate control sits with the Shareholders.
So if these parties are set up correctly this can be a great alternative.