There are many types of trusts in Australia that serve as essential and practical tools for asset protection, tax planning, and succession planning. By separating legal and beneficial ownership of assets, trusts are integral to financial planning and legal frameworks.
This article will explore the different types of trusts in Australia.
What is Covered:
1. Discretionary Trusts (Family Trusts)
Discretionary trusts, commonly referred to as family trusts, are prevalent types of trusts in Australia. In such trusts, the trustee has discretion in determining which beneficiaries receive the income or capital from the trust and in what proportions.
Discretionary trusts can offer tax benefits by allowing income distribution to beneficiaries in lower tax brackets. Furthermore, since the assets are owned by the trust rather than the beneficiaries, family trusts provide asset protection in cases of bankruptcy or litigation.
2. Fixed Trusts
In a fixed trust, beneficiaries have a fixed and defined interest in the trust’s income or capital, set out in the trust deed. Unlike a discretionary trust, the trustee has no discretion in distributing the trust assets. This clear and predetermined allocation makes fixed trusts appealing in business contexts, such as investment schemes.
3. Unit Trusts
Unit trusts are types of fixed trusts. They could be seen to work like company shares, with ‘units’ that define the beneficiaries’ entitlements. Each unit owned by a beneficiary represents a fixed portion of the trust’s income or capital. Unit trusts are often employed in joint ventures or investment trusts, where beneficiaries want a clear, defined interest in the trust.
4. Testamentary Trusts
Testamentary trusts are established by a will and come into effect after the person’s death. They serve to protect assets and control the distribution of wealth to beneficiaries, often minor children. Testamentary trusts can also offer substantial tax advantages through income splitting among family members.
5. Superannuation Trusts
All superannuation funds within Australia are managed via trusts. The primary purpose of these trusts is to provide retirement benefits to its members. Though offering considerable tax advantages, investment control, and flexibility, they require careful compliance with the regulations established by the Australian Taxation Office and the Superannuation Industry (Supervision) Act 1993.
6. Bare Trusts
In a bare trust, the trustee holds assets on behalf of beneficiaries without any power or discretion over them. Legally, the trustee must transfer the assets to beneficiaries upon request. Bare trusts often come into play in property transactions, holding a property for the beneficial owner until a specific event takes place.
7. Hybrid Trusts
Hybrid trusts blend elements from discretionary and unit trusts. They offer trustees discretion over the distribution of income and capital but also feature fixed interests akin to a unit trust. While these trusts can be complex, they offer flexibility in tax management and asset protection.
8. Charitable Trusts
Charitable trusts are established to hold money or assets and conduct activities for charitable purposes. Often created to give back to the community, promote education, advance religions, or benefit the community in other ways, charitable trusts can qualify for certain tax exemptions and concessions.
9. Special Disability Trusts
Special Disability Trusts are designed specifically for the future care and accommodation needs of a person with a severe disability. Established under Australian social security law, these trusts allow immediate family and carers to make private financial provisions for the future care and well-being of the person with a disability. These trusts have certain tax and social security concessions, making it a beneficial structure for those supporting family members with disabilities.
In Summary
Trusts in Australia encompass a wide variety of structures each designed to cater to specific needs and purposes. The nine key types of trusts include Discretionary Trusts (Family Trusts), Unit Trusts, Testamentary Trusts, Fixed Trusts, Superannuation Trusts, Hybrid Trusts, Charitable Trusts, Special Disability Trusts, and Bare Trusts.
From the flexibility and tax advantages offered by Discretionary and Unit Trusts, to the particular uses of Fixed and Superannuation Trusts for business and retirement purposes respectively, the choice of trust structure depends on the specific requirements and goals. Testamentary Trusts become effective upon death, providing tax benefits and asset protection, whereas Charitable Trusts serve public benefit purposes. Special Disability Trusts aim to secure the future of a person with severe disability and Bare Trusts involve a simple structure where a trustee holds property for the benefit of others.
Ready to learn more?
Check out our guides, for more information covering different types of trusts:
- What is a Family Trust?
- Understanding Bare Trusts: A Comprehensive Guide
- Demystifying Unit Trusts: Your Ultimate Guide
