What Is the Settlor of a Trust?

You might wonder, “What does ‘settlor’ mean?” especially if you’ve been exploring Australian Family Trusts. 

In simple terms, the settlor of a trust is the person who creates a trust. They provide the initial asset, the “settled sum”, kick-starting the trust.

What Is the Role of a Settlor in a Trust?

A settlor of a trust is an individual tasked with establishing a trust. Their role includes naming the beneficiaries, the trustee, and the appointor. For tax reasons, it’s recommended that the settlor not be a beneficiary under the trust.

To start a trust, you first need to pick a settlor. This person gives the “settled sum,” or initial trust property, to the trustee. The trustee holds this money or property for those who will benefit from the trust. After the settlor gives the settled sum, the trustee should provide them with a receipt.

This transfer of the settled sum creates the trust, and it makes a few key things clear:

• The trustee is now in control of the trust property.
• The beneficiaries of the trust, as defined by the settlor in the trust deed, are now recognised.
• The trustee has agreed to act based on the terms of the trust.

After these steps are done, the settlor usually finishes their role and steps back. They help start the trust and pay the settled sum, but that’s all they do.

Who Should Be a Settlor of a Trust?

Choosing the right settlor for your trust is crucial. The settlor should be someone unrelated to you or a beneficiary of the trust. This could be a close friend or a work colleague.

If an accountant or lawyer helps you set up your trust, they can serve as the settlor. But remember, they finish their settlor role once the trust starts. After that, they can stick around to give you legal or accounting advice.

If you’re using an online service to set up the trust, a friend or coworker could be a good choice for the settlor. They need to be over 18 and willing to sign the trust deed. Before they agree, make sure to explain what a settlor is and what their role involves. It’s important that they know their involvement ends once the trust is set up.

Whoever you choose as the settlor, they have to pay a settled sum (typically $10) to start the trust. Crucially, this payment should not be reimbursed.

Can a Settlor of a Trust Be a Beneficiary?

In essence, even though no law says the settlor of a trust can’t also be a beneficiary, it’s not a good idea. This is because it could lead to tax problems and make running the trust more complicated.

Now, let’s dig a little deeper. The Income Tax Assessment Act 1936 (Cth) (ITAA), sections 102(1)(a) and 102(1)(b) serve as essential guides. Section 102(1)(a) effectively restricts a settlor from changing or ending the trust to receive income from it. This rule aims to stop people from using trusts unfairly for their own benefit.

Section 102(1)(b) of the ITAA addresses situations where a trust is set up to benefit a settlor’s minor child. If the trust uses its income to benefit a minor child, the tax authority may require the trustee to pay income tax. This income gets added to the settlor’s income when calculating taxes as if the settlor earned it.

Trust deeds often ensure that the settlor and their family can’t benefit from the trust. This helps avoid problems with conflicts of interest and taxes.

How Much Should the Settled Sum Be?

The settled sum is the initial amount given to the trustee to establish the trust. Typically, this is a nominal amount, like $10.

It’s essential to document the receipt of this sum. It is standard practice to deposit the settled sum into a bank account. This action provides robust evidence of the trust’s establishment.

In addition to the bank deposit, the trustee should provide a signed receipt for the settled sum. This acts as another layer of proof, further confirming the trust’s validity.

Remember, while the amount of the settled sum may seem small, it is the official launching point of your trust. Therefore, keeping clear records of its payment is essential.

Summing Up

A settlor of a trust plays a key role in starting an Australian Family Trust. Their job ends after the initial setup and payment of the settled sum, usually $10.

It’s common to choose an unrelated person, like a friend or a colleague, as the settlor. They should understand they won’t have future involvement in the trust.

Your Next Steps

Ready to learn more?

Want to learn more? Our comprehensive guide, What is a Family Trust, is packed with helpful information on the topic.

Then, turn to our Setting Up a Family Trust in Australia guide to familiarise yourself with the setup process.

Don’t forget to consider potential expenses. Our How Much Does it Cost to Set Up a Trust guide provides insights into the costs associated with establishing a trust.

Remember, when dealing with complex financial structures like trusts, professional advice is essential.