The different types of trusts, when understood properly, trusts can assist people successfully plan finances, provide security for families, or achieve confident investing. There are a large number of different types of trusts and it is important to identify which type of trust will best suit the overall goal for having one. Here is a list of the most common types of trusts and an explanation that outlines their purpose.
Fixed trusts are the most known of all trust types as they are simple in form. Fixed trusts provide for a specific proportion of assets to be distributed to specific beneficiaries. A trustee is bound to distribute the assets as beneficiaries have an automatic entitlement of their portion and can enforce the administration of the trust. This format is useful in avoiding potential conflicts between multiple beneficiaries over their interest in the trust. Beneficiaries will also enjoy a 50% discount off their capital gains tax over any assets received from the trust.
A hybrid trust is a great alternative to fixed and discretionary trusts as it is a mix of the two. It allows for beneficiaries and trustees to enjoy the benefits that come with both trusts which mainly are that beneficiaries enjoy a fixed interest to assets and trustees have discretion over its distribution.
Discretionary Trusts (Family Trusts)
Discretionary trusts main disparity to fixed trusts is the fact that the beneficiaries do not possess a fixed interest over the assets in these trusts. These types of trusts give trustees the power to decide when, how much, and to whom to distribute assets. This flexibility provided to trustees goes even further in that they can remove or add a beneficiary to the trust at any time. However, with this power comes at a price as it is the trustee who is liable for any loss or debt incurred through the trust.
Discretionary trusts also receive a 50 percent discount off the capital gains tax and allow for asset preservation as the assets in the trust are separate to the assets of the beneficiary. This means that if a creditor is collecting assets from a beneficiary to repay debt, their assets in the trust will be safe from this as the beneficiary has no entitlement over the trust.
Testamentary trusts hold assets that are distributed once the set who set it up (the testator) dies. This type of trust is created through a will and only operates once the death occurs. A trustee has full discretion over the assets and their distribution. A person may choose to set up a testamentary trust for several reasons such as to prevent a challenge to a will, to ensure a person’s estate it passed to the desired relatives, or to take advantage of its tax benefits.
Superannuation trusts are made for the purpose of providing security during retirement. All superannuation funds in Australia are superannuation trusts and will be subject to federal legislation that set standards for all superannuation trusts to satisfy. The most well-known of these legislative requirements is that access to these trusts is prohibited until the age of 65.
Superannuation trusts are a great alternative to public superannuation trusts (superannuation funds) as this type of trust allows a person to control their own retirement funds and determine investments. The administrative costs associated with managing a superannuation trust can also be less than the continued fees set by public superannuation trusts. However, these types of trusts require continuous and vigilant attention to the fund’s investments, the economy, and legislative changes to ensure compliance with legal requirements over trusts.
As one can gather from its name, charitable trusts are trusts set up for a purpose of something charitable. This purpose can be for a range of things such as to reduce poverty or improve social and public welfare. An example of this is when a person (the donor) nominates an organisation to whom the funds of the trust will be distributed once they die. This type of trust allows for donors to claim tax deductions on any donations made to the trust and unlike most trusts, does not wound up after 80 years. However, as the charitable focus of a trust will inevitably affect the public, these types of trusts will be heavily monitored.
Bare trusts are often used by beneficiaries who want to have someone else hold their assets on their behalf without giving them any control. There will only be one trustee and one beneficiary in a bare trust and the beneficiary will have complete control over the nominated trustee. Therefore, the trustee will only be responsible for holding the assets and must follow the beneficiary’s instructions. As the beneficiary has an absolute right to the assets in the trust, these trusts do not provide the same level of asset protection compared to other forms of trusts and creditors will have access to it.
Unit trusts operate a little differently to the other types of trusts as the beneficiaries are the ‘unit holders’ who have interest over their ‘holding units’ within the trust. These units are similar to shares as it allows unit holders to divide their interest in clear and fixed percentages. Therefore, if someone has 50 units in a unit trust, they will have a 50% interest in the trust’s assets against the other unit holders. This is a fixed entitlement and the unit holders can transfer their units to a buyer if they wanted to. This type of trust is commonly adopted by people seeking to put their money together with other people in a ‘pool’ of assets for investment purposes. An example of this would be a retail investment fund. However, unit trusts can be used by smaller investors for small scaled property investments. Overall, unit trusts provide security for people investing their money alongside other investors and also provides unit holders with a 50% discount on their capital gains tax.
Special Disabilities Trusts
A special disability trust allows immediate family members and carers to set up a trust to benefit another family member. Before the trust can be set up, the prospective beneficiary must be assessed as severely disabled per the requirements of the trust’s legislation.
Family members will then be allowed to make private financial contributions for the future and current care of the beneficiary. The trust beneficiary can use the money from the trust to help pay for a variety of expenses, such as medical and accommodation expenses. That’s the lists of the different types of trust.
What Kind of Trust is best for your situation?
The different types of trust, the range of trust types allows people to establish a trust that best suits their needs. It is important that a person wishing to set up a trust evaluates their goals and motives. Particularly, look at whether the trust is to provide family with financial stability, gather investments or to rearrange assets.