A trust is a structure wherein a Trustee (either an individual or company) carries on the operations of the Trust on behalf of the beneficiaries. The actions of the Trustee are governed by the Trust Deed, which details the rights and obligations of all parties. Trusts are a common structure choice for family businesses as it enables the various family members to become beneficiaries of the Trust that is operating the business. While the trust is not a separate legal entity it is a separate entity for tax purposes. The trustee must apply for a Tax File Number (TFN) for the trust and lodge an annual income tax return.
If a company trustee is used, the trust offers all the same asset protection benefits as using a company structure, along with the additional benefits of using a trust. A trust that has individuals acting as trustees exposes the trustees (the individual, or individuals) to same levels of business risk as a sole trader.
Broadly speaking there are two common types of trusts that you will encounter when making your business structuring decision: Fixed Trusts and Discretionary Trusts.
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A Discretionary Trust is the most flexible form of business structure for a family trust. No single beneficiary has a fixed interest in the trust’s property or the trust’s income. The trustee has complete discretion in the distribution of funds to each beneficiary. This makes the Discretionary Trust (with a corporate trustee) a strong and flexible option for a family business. The family members are protected from business risk and the trustee has the discretion to distribute the income in the most effective way possible.
It is important to remember that all of the benefits offered by a discretionary trust for a family business make it a poor choice for businesses where more than one family or group is involved, as neither group of beneficiaries retains a fixed entitlement to property or income.
Fixed (or sometimes called “Unit”) Trusts are recommended when more than one family or group is involved in the business operation. The interest in the trust is divided into units, similar to shares in a company. The Trustee distributes income to the beneficiaries in accordance with their respective holdings in the trust. This is the key point of difference between Fixed and Discretionary Trusts: The units remove the Trustee’s discretion concerning the distribution of income.
Business owners looking to shift their business operations into a trust structure can experience a number of benefits. We strongly recommend anyone interested in setting up a trust seek professional advice before doing so. Given the additional requirements of using a trust, we work closely with all clients that use this structure to ensure all their obligations are satisfied and it is used in the most efficient manner possible.
For more information about trusts or other structuring options please refer to our other articles in this series, or contact us for more a business structure review.
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