Nature of a Private Trust

The trust is the most flexible structure to hold and distribute assets and if established with specific purposes other than minimizing tax obligations is the best means of protecting assets.

The Trustee who holds the legal or equitable interest in certain assets is bound by an equitable obligation to hold that interest not for his own exclusive use or benefit but for the benefit of the beneficiaries defined in the trust declaration.

The trust allows the Trustee to control the trust property without having beneficial ownership. Based on the obligations or objects set out in the Trust, the Trustee can determine which Beneficiaries will receive benefit from income and from capital gains.

A trust exists where the Trustee holds or has title to property, of which he is not the owner in his own right, for the benefit of beneficiaries for any purpose set out in the Trust declaration. Families can hold, protect, and pass on their property from one generation to the next. They are now used not only by individuals and families but also by institutions in some of the most complex commercial transactions.

A Trust declaration records the instructions of the person creating the trust (known as the settlor or grantor). The deed sets out the terms of the trust and provides details of the manner in which the trust property is to be administered and distributed. The distribution instructions may nominate individuals for benefit, postpone the interests of individuals for many years, or, more usually, provide for the selection, by the trustees themselves, of those who are to benefit.

Discretion may be given to the trustees not only in the distribution of trust property but also in its investment and management. Trustees are subject to high standards of professionalism obligations as fiduciary agents. They are obliged, by statute, to enforce the trust and are liable to the beneficiaries for breach of their duties.

Essential elements of the Trust

1            The Trustee;

2            The Trust Property;

3            The Beneficiaries, and

4            The Personal Obligation annexed to property

The Trustee

The Trustee must use its legal entitlement for the Beneficiary’s benefit and in whom there is an obligation to deal with the Trust Property in terms of the Trust. It holds any trust property legally, i.e. trust assets registered in the name of the Trustee even though it acts for Beneficiaries. The Trustee can be either an individual or a corporation. The advantages of using a corporation are:

• Limited liability;
• Ongoing succession, and
• Business continuity not disrupted by the death of an individual trustee

The Trust Property

The Trust must have property capable of being held on trust. The property can consist of different types, such as goods, real estate, cash or rights and entitlements.

The Beneficiaries

The Trust must have identifiable beneficiaries and a Trustee may be a beneficiary, but he cannot be a sole beneficiary. If he is, then there is no trust because there is no separate equitable interest vested in the beneficiary and there is a merger of the legal and equitable interests.

The Personal Obligation annexed to property

The Trustee must be under a personal obligation to deal with the Trust Property for the benefit of the Beneficiaries and this obligation must be annexed to the Trust Property.

Creating the Trust

An owner of property (being the Settlor) can create a trust when he directs another party to hold property in trust for another.

The Settlor cannot make himself the Trustee otherwise the Trust is not perfectly created and is unenforceable. The Settlor can, at the time of establishing the Trust, define, identify and determine which Beneficiaries can receive benefits under the Trust.

Appointment, retirement and removal of the Trustee

The Trust declaration can set out the powers to appoint or remove the Trustee and usually the declarations give that power to a person known as the Appointor. If the Trust declaration does not contain those powers, the Supreme Court has the power to determine the appointment or removal pursuant to the Trustee Acts.

For asset protection purposes, the Appointor should not be the Trustee or one of the Beneficiaries; however, it is prudent to have another person who has fiduciary relationship to the Beneficiaries.

Fiduciary Relationship

The Trustee has a fiduciary relationship to the Beneficiaries and must exclusively serve the interests of the Beneficiaries. The Trustee cannot pursue separate personal interests and must pursue the interests of the Beneficiaries.

The Trustee has a right of indemnity against the Trust assets. However, if the Trustee has breached its fiduciary duty to the beneficiaries, then the Trustee is personally liable to account for any private profits.

Commencement of the Trust

For taxation reasons, it is essential to show when the Trust commenced. Evidence of execution of the Trust declaration is, on its own insufficient to establish the existence of the Trust.

Every Australian State Revenue Office either charges or exempts payment of stamp duty on the creation of the Trust. Regardless, of whether stamp duty is payable or not, a State Revenue Office Certificate is issued on the application of the Trustee and this certificate is critical evidence to prove the commencement date of the Trust.

Proper purpose of Trusts

• Protect assets
• Succession and continuity of ownership
• Division income and obtain taxation benefits

The proper use and implementation of the Trust can result in greater asset protection and taxation benefits.