There are many types of trusts commonly used for commercial dealings, asset protection, privacy, tax efficiency or for succession planning. The type of trust appropriate for you will depend on the type of transaction or asset you are dealing with. We explore three different types of trusts: a bare trust, a unit trust and a discretionary trust.
What is a Bare Trust?
A bare trust is the simplest type of trust structure. In a bare trust, a trustee holds an asset on trust for one or more beneficiaries in defined portions.
The trustee has no discretion and no active duties other than to distribute the asset to the named beneficiaries when instructed by them to do so.
A bare trust is a popular structure where the ultimate beneficiary seeks to keep the asset in the name of a different entity for privacy or for asset protection reasons.
For example, if real estate is purchased in a bare trust, the registered proprietor listed on the certificate of title will be the trustee of the bare trust, not the beneficiary. On an initial glance of a title search for the property, the bare trust arrangement will not be apparent, and third parties will be unaware who the ultimate beneficiary of the property is.
Of course, in circumstances where a beneficiary is required to disclose their assets or financial interests, the beneficial interest in the property held should be disclosed.
A bare trust is also a popular structure when purchasing a single asset for the benefit of a self-managed superannuation fund (SMSF). A bare trust arrangement can be used to allow a SMSF to borrow funds from a third party in order to acquire a single asset and still be in satisfaction of the Superannuation Industry (Supervision) Act 1993 (Cth). This is referred to as a limited recourse borrowing arrangement.
It is important to recognise and understand your obligations as a trustee and beneficiary when opting for a bare trust arrangement and whether this type of structure is best suited for the asset or assets you want protected.
What is a Unit Trust?
A unit trust is a popular structure for investments such as property developments and other business ventures. In a unit trust, a "settlor" contributes a nominal amount to the unit trust which is then held by the "trustee" for the benefit of the "unitholders" in defined units in compliance with the terms of the trust deed. The trust deed will generally allow for the subscription of further units in the trust.
A unit trust is a useful structure in circumstances where one or more of the unitholders intend to sell or transfer their units and exit the trust structure. This type of structure allows for the continuation of the unit trust even when a unitholder wishes to exit.
Any taxable income or capital gain from the trust flows through to the unitholders in the proportions of their units.
A unit trust is generally an appropriate arrangement for unrelated parties who intend to combine their resources for an investment.
It is recommended to obtain legal and accounting advice before the establishment and during the administration of a unit trust to understand the complexities involved. Along with the trust deed, it is advisable to have a 'unitholders agreement' in place as it allows the unitholders to define their relationship with each other and obligations between them.
What is a Discretionary Trust?
A discretionary trust is a popular structure, especially for families and for income streaming purposes. In a discretionary trust, a "settlor" contributes a nominal amount to the trust which is then held by the "trustee" for the benefit of the beneficiaries. The beneficiaries are usually defined as either being a primary or named beneficiary or will fall in the class of a general beneficiary (ie. children of the primary beneficiaries).
The main benefit of a discretionary trust is the flexibility and discretion it affords the trustee. Generally, a trustee can decide to distribute the capital or income of the trust to any one or more beneficiaries from the broad class of beneficiaries. This distribution is discretionary as trustees can elect to distribute to one beneficiary and not another.
Many families establish discretionary trusts, without having an appreciation of the number of persons who may fall within the class of beneficiaries. Depending on the trust deed, it may include current spouses, previous spouses, de-facto partners, children, stepchildren, parents, uncles, aunts, nieces and nephews and the list goes on.
Whilst there is no obligation to distribute any specific amount to those persons, there are certain obligations owed by a trustee to all beneficiaries of the trust – no matter how distant the relationship from the primary beneficiary.
Many families also have a false perception that an asset of a discretionary trust is an asset belonging to them. In fact, the asset is the property of the trust until the trustee determines to distribute the asset to any one or more of the beneficiaries of the trust. This can cause problems if the 'controller' of the trust hasn't dealt with the succession of the trust upon death or considers that their Will dictates what happens. Failure to consider the succession of a discretionary trust, may result in the 'wrong' beneficiaries benefitting from the trust assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.