What is a Trust?

Definition

A trust is not defined in the Income Tax Assessment Act however, it is a well established relationship developed by the Courts of Equity. Underhill (Law of Trusts and Trustees 12th Edition, page 3) defines a trust as follows:

“A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property), for the benefit of persons (who are called beneficiaries) of whom he may himself be one and any one of whom may enforce the obligation.”

A trust is therefore the relationship which arises where a person is compelled to hold property for the benefit of some persons of whom he may be one.  A trust creates a fiduciary relationship with respect to property, subjecting the person (trustee) who holds the property, to deal with the property for the benefit of other persons.

Parties/ Elements to a Trust

Settlor

A settlor is a person who advances the money or assets initially into the trust.  The settlor cannot be a beneficiary.

Trustee

The trustee is the person or entity with the responsibility of looking after the property settled into the trust for the benefit of beneficiaries.  The trustee may also be a beneficiary and the appointer.

Appointor

The appointor is named in the deed by the settlor when a trust is established.  It has numerous powers under the trust deed which may include the removal of the trustee.  The Appointor and the Trustee can be the same person.

Beneficiaries

These are the people or entities for which the trust is established and for whose benefit the trust is administered.  There may be income and/or capital beneficiaries.

Under trust law there must also be a beneficiary identified to take any money remaining in the trust at the termination date (this could be the perpetuity period or an earlier day elected under the rules of the trust deed).  In most instances a trust deed will contain a charitable beneficiary for this purpose.  It is unlikely that any money will be left within the trust for distribution to this charitable beneficiary.

The Obligation under the Trust Deed 

These are the obligations that bind the trustee to deal with the property for the benefit of the beneficiaries.

Features of a Trust

Trust Deed

This is a document whereby the trust is established.  There is no requirement for a trust deed to be stamped by the Office of State Revenue where it only established with cash.  It is preferable that all trusts are established with only the settlement sum as the asset of the trust.

Perpetuity Period

For a trust to be valid they must comply with the law relating to trusts and in particular in Queensland the term or existence of a trust must not exceed eighty (80) years.  This is called the perpetuity period, or may also be referred to as the vesting date.

Legal Identity

A trust is not a separate legal identity from the trustee.  This is different to the situation that exists with a company, where a company is a separate legal entity as opposed to the directors.  A trust is a legal fiction and it is the trustee that is the defendant in any legal action.

Types of Trusts

Over the last 40 years or so, there has been a significant increase in the use of trusts, not only in the implementation of estate planning, but also as a device in tax planning for family businesses….