If you’re managing a trust or involved in one, you’re not alone if the whole thing feels a bit confusing. Trusts can be an important tool if you’re running a business or an investment portfolio (or both!) and they can be tricky to understand. The good news is they don’t have to be!
Who should read this article? Any business owner, investor or person planning the future of their wealth, regardless of whether you already have a trust set up or not.
We’ve created this simple guide to help you get clear on what a trust is and what makes the trust deed so important on your path to success and financial freedom.
What is a trust?
At its heart, a trust is a legal setup based on—you guessed it—trust.
One party, called the trustee, holds an asset (like money or property) for the benefit of another person, known as the beneficiary. The trustee manages, protects, or passes on the asset to benefit the beneficiary, hence the name!
And here’s a key point: a trust only exists if there’s an asset involved. No asset, no trust!
Real-world examples of trusts in everyday life
1. Deceased Estate
When someone passes away, their estate —whether it’s money, property, or cherished keepsakes—needs to be distributed according to their wishes. This usually happens through a Will (a type of trust). The executor of the Will acts like the trustee in most cases, managing the deceased person’s assets, and distributing them accordingly among those named in the Will (the beneficiaries).
2. Superannuation Fund
In Australia, employers are required to contribute money to your superannuation fund to save for your retirement. This superfund is a form of trust, where the money is held by a trustee until you reach retirement age, at which point it is available to you, the beneficiary.
3. Family Trust
This is a trust that’s set up for the benefit of a family, often used to run a family business or hold assets or investments. The beneficiaries of this trust are limited to members of a family group.
4. Bloodline Trust
This is a special type of trust used in estate planning that allows for distributions (benefits) to members of a person’s direct bloodline. A key feature of this trust is its ability to protect wealth from being claimed by outsiders.
Why set up a trust?
A trust can serve many purposes, especially for business owners and investors. Here are some common reasons to consider setting one up:
- Protecting Your Assets: A trust shields your personal and business assets from potential risks.
- Flexible Income Distribution: You can decide how and when income is shared, making financial management easier.
- Succession and Wealth Planning: Trusts help ensure your hard-earned wealth is smoothly managed for succession or inheritance.
Before you create a trust, it’s crucial to fully understand your situation and goals. This way, you’ll know the trust is set up to work exactly how you need it to.
So how can my trust shield me or my business from risk?
Unfortunately, wherever there are people willing to trust, there are others looking to exploit that trust. That’s where the trust deed comes in.
If you’re involved in a trust, you can think of the trust deed is like its rulebook that can protect you and your assets.
The trust deed is a document that explains the rules for how the trust works. It tells the trustee what they can and can’t do with the trust’s assets and what the beneficiaries are entitled to. It also explains how long the trust will last and who will benefit from it.
- For example, a family trust lets the trustee decide who gets the business profits each year. A unit trust, on the other hand, gives profits based on the proportion of units held by each beneficiary.
It’s important for the trustee to follow these rules. If they don’t, they could be responsible for any losses. That’s why it’s key to check the trust deed if anything goes wrong.
Talking to your accountant about your trust deed can help make sure everything’s set up right from the get-go.
The Bottom Line? Trusts matter!
Trusts play a big role in protecting and transferring assets in today’s world. They ensure that your assets reach the right people at the right time. As we mentioned above, a trust is created when a trustee holds and manages assets (things like money, heirlooms, or property) for a beneficiary based on the rules in the trust deed. This structure keeps things fair, transparent, and accountable for everyone involved.
Still have questions about trusts or how they might impact you? Our expert team is always here to help. Reach out if you need guidance on your current or future trust setup.
Have a question or comment?
If you have any questions or comments relating to this article (or any other accounting matter) please get in touch with us at [email protected] and we’ll be happy to assist you.
