There are a variety of structures a business can operate under. These structures include sole trader, partnership, company and trust. A business’s structure is dependent on its growth prospects, the number of members and owners and the potential liability of key members of the business.
An often complex and misunderstood business structure is a trust.
What is a trust?
Trusts are commonly used to protect business assets for beneficiaries. In a trust, the trustee is responsible for carrying out the operations of the business on behalf of the beneficiaries. Trusts require a Trust Deed that outlines the responsibilities of the trustee and details how the trust will operate. A Trust Deed should be drafted by a solicitor.
Who is involved in a trust?
The following parties are mandatory in a trust business structure:
- The settlor: The person or entity who sets up the trust and nominates the beneficiaries.
- The trustee (or trustees): An individual, company or otherwise who administers the trust and has control over the assets. The trustee is legally responsible for managing the trust’s income and tax liabilities.
- The beneficiary (or beneficiaries): The person or entity who benefits from a share of the trust.
Trusts may also include an appointor who has the power to appoint or remove a trustee.
Advantages of a trust
The benefits to using a trust structure include:
- Separation of the beneficiary and the trustee. Separating these actors is useful if a beneficiary suffers from a condition that impairs decision making or if they do not wish to be actively involved in managing the business operations.
- Greater flexibility in income tax management. The trustee can choose to distribute profits in a manner which minimises income tax payable if there are discretionary powers in the Trust Deed.
- The trust structure can provide more privacy than a company.
Disadvantages of a trust
Though there are several benefits to setting up a trust, there are also a number of limitations to consider:
- Expensive and complex. Trusts are expensive to set up and require the trustee to undertake formal yearly administrative tasks. Once established, it can be difficult to dissolve or make changes to the trust.
- Difficulties with loans. Due to the additional complexities of loan structures, it may be difficult for trustees to acquire a loan.
- Strict distribution of losses and profits. Profits must be distributed to beneficiaries each financial year otherwise the trustee must pay tax on undistributed income. Losses cannot be distributed so the trustee is personally liable for the debts of the trust.
Types of trusts
There are two main types of trusts that can be used by businesses:
- In a Discretionary Trust, the trustee can vary the Trust Deed to decide how the income of the business is distributed to the beneficiaries. This means that income and even capital distribution is flexible and can be tailored to the needs of the beneficiaries. Undistributed income, however, is taxed at the highest marginal rate which means that trustees are at risk of being liable for debts.
- In a Unit Trust, the property is divided into defined shares called units. Like a company, the beneficiaries are entitled to the income and capital of the trust in proportion to the number of units they hold. Losses, however, cannot be transferred to other entities and beneficiaries are subject to PAYG calculations.
Registering a trust
Before registering a trust, it is best to speak to a business adviser, lawyer or accountant to ensure a trust structure is appropriate for your business objectives. It is also crucial that you have a Trust Deed prior to registering which details your trustees, beneficiaries and the distribution of assets. Accordingly, you should be aware of the tax obligations of your chosen trust structure before registering.
To learn more about trusts and other business structures such as sole trader, partnership and company, please visit our website.
Contact us
If you are planning on registering a trust or are needing to adjust an existing trust, we recommend seeking professional advice. If you would like to discuss your business with a legal professional, please contact us on (02) 9963 9800 or via our online contact form.
FAQs
One of the biggest advantages of trusts is that they prevent your family from having to undergo the lengthy and costly process of probate at the time of your passing. However, they are initially a larger investment and require more information at the planning stage than a last will.
What are the cons of a business trust? ›
There are three complications you may run into if you create a business trust to own your business. The first is there's going to be an ongoing cost to maintain the trust. So somebody's got to manage the trust. There's going to be additional administration costs it's going to have separate paperwork it needs to file.
Is it a good idea to put a business in a trust? ›
Benefits to Your Trust Owning Your LLC
There are several big benefits to placing an LLC in a trust. These include: Probate avoidance or minimization. If you place your membership interest for your limited liability company into a trust that you helped to create, it won't be subject to the probate process.
Should I put my family business in a trust? ›
The use of a trust for succession planning has proven beneficial for creditor protection when it comes to lawsuits and preserving company assets within the family in the case of divorce proceedings.
Why do rich people put their homes in a trust? ›
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits.
Is it better to gift a house or put it in a trust? ›
If the trust is structured properly, it can have a tax advantage for your beneficiaries. Assets that have gone up in value will receive a “step-up” in basis on your death, which means your beneficiaries will pay less in capital gains taxes. Assets that are gifted do not receive a “step-up.”
Why use a trust instead of an LLC? ›
The answer is that the LLC is designed to protect your personal assets from lawsuits, while the Living Trust preserves your estate from probate costs and inheritance taxes when you die, and prevents court control of your assets if you become incapacitated.
Why should a company be owned by a trust? ›
For example, placing a business into a revocable trust during life allows a business owner to maintain control over the business during life while also laying out the blueprint for how the business should continue after they have passed or become unable to run the business.
Why do business owners like trust? ›
trusted companies have more loyal customers, lower employee turnover, higher revenue and profitability, and higher market value. Also, higher levels of trust result in lower costs of doing business.
What is the difference between a family trust and a business trust? ›
Family trusts can also be used in conjunction with living trusts or a special needs trust. Business trusts are set-up for individuals who may or may not be family members. They are also held for the benefit of a business or individual related to the business.
Placing your important assets in a trust can offer you the peace of mind knowing ownership of assets will be passed onto the beneficiary you designate, under the conditions you choose, and without first undergoing a drawn-out legal process.
How does a trust company work? ›
A trust company may provide expert investment, asset management and estate settlement services for clients who need them. Although they aren't for everyone, a trust company can provide a variety of investment, tax and estate planning services for their customers.
What is the negative side of trust? ›
Your Assets Might Not Be Protected: Another crucial point to note is that not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets. Potential Tax Burdens: Finally, trusts can carry potential tax burdens.
What are reasons to not have a trust? ›
Four Reasons You Don't Need a (Revocable) Trust
- Probate avoidance is the only goal. While this is an admirable goal, a trust may not be the only way to avoid probate. ...
- You have straightforward wishes. ...
- You're motivated by tax savings or Medicaid eligibility. ...
- You're not great at follow-through.
A living trust does not protect your assets from a lawsuit. Living trusts are revocable, meaning you remain in control of the assets and you are the legal owner until your death. Because you legally still own these assets, someone who wins a verdict against you can likely gain access to these assets.
What is the downfall of a living trust? ›
Complexity: Managing a trust requires ongoing paperwork and record-keeping, which can be burdensome and time-consuming. No Tax Benefits: Unlike some other estate planning tools, a revocable living trust does not offer direct tax advantages or reductions.
