Last updated: 04th Feb 2025
They’re not just for wealthy folks. Even if you’ve never looked into trusts before, you’re probably part of a trust right now, because superannuation funds are a type of trust.
In fact, there are a multitude of trust types, which can be confusing. Let’s examine the core trust types used in Australia and why they can be useful.
How Does A Trust Work?
When you create a trust, you:
- Appoint a trustee or trustees (which can include yourself);
- To oversee the management of the trusts assets;
- For the benefit of others (you can also be a beneficiary).
The key components of a trust include:
- The trustee/s: The person or organisation that legally owns and manages the assets held by the trust — including making investment decisions, organising distributions of assets/income, and filing the trust’s tax returns.
- The beneficiary or beneficiaries: The person or people who receive income from assets held by the trust, or who take ownership of the assets held by the trust at the end of the trust’s term (aka its vesting date).
- The trust deed: A document that clarifies the rules of the trust, such as what can be distributed and to who. You may not need a trust deed where the rules of the trust have been set out in a person’s Will.
- The appointer: A person with the power to appoint and remove the trustee, and appoint a replacement. It could be the trustee themselves, the primary trust beneficiary, or a trusted advisor/person not involved in the trust.
A trust also requires a settlor, who sets up the trust — typically this is an accountant or lawyer you’ve chosen to help you through the process.
10+ Essential Types Of Trusts Used In Australia.
There are two main categories of trusts used in Australia to set-up a business or distribute wealth. These are:
- Discretionary trusts: Also known as family trusts, a discretionary trust is one where the person in control of the assets held (the trustee) can use their own discretion in determining who to share the income/assets with and how much each beneficiary gets.
- Fixed or Unit trusts: Have more definitive rules about how income is shared based on either a fixed entitlement, or the number of units allocated to each beneficiary (similar to how shareholders returns are delivered in line with the number of shares held).
You can also create what’s known as a hybrid trust with elements of both a discretionary trust and a fixed trust.
For instance, your trust deed might state that all trustees get an equal share of the interest earned on cash held by a trust.
However, the actual cash will be distributed at the trustee’s discretion when the trust is terminated — which might be triggered by the death of a family member.
Living Trust Vs Will.
Trusts originated in ancient Roman times with the legal concept of fideicommissum allowing for the transfer of wealth and property after death.
Then the idea of protecting transfers of wealth held during one’s lifetime arose during the middle ages in England.
A living trust can refer to any trust you establish while you’re still alive, but it’s often talked about in relation to estate planning.
For instance, you might use:
- A living trust (also known as an Inter vivos trust) to manage all your rental properties and shares, ensuring your favourite grandchildren can receive the rental and dividend income as distributions while you’re alive — and then take possession of the assets when you pass on.
- A testamentary trust within your will, which only becomes activated — and controlled by your chosen trustee — upon your death. The trustee could then take care of the assets and distributions on behalf of a minor (e.g., a young grandchild) until they reach legal age.
A trust is viewed as a more watertight option than a Will, and helps avoid probate (legal proceedings), and challenges, which can be costly and time-consuming.
Important!
Assets held within a trust aren’t considered part of your estate when you die. They remain under the control of the trustee/s, who can directly transfer assets to beneficiaries.
A living trust might also be revocable or irrevocable, which refers to whether you can make amendments to the terms or not.
Special Purpose Trusts, Investments And Super Funds.
There are various other labels used for trusts created for specific purposes, such as:
- Special Disability trusts: Where the trustee manages assets for the benefit of a person with a disability that prevents them from managing their own assets.
- Charitable trusts: Where the beneficiary or beneficiaries are a charitable organisation or cause, often done to take advantage of tax concessions on donations.
- Blind trusts: Where the person who creates the trust and its beneficiaries have no knowledge of how the assets are being managed by the trustee — to reduce conflicts of interest.
In addition:
- Many investment vehicles have the underling structure of a trust. This includes managed funds, ETFs and Real estate investment trusts (REITs) that may be unlisted or available to trade via a stock exchange. These are called public unit trusts.
- All Australian super funds, including self-managed super funds (SMSFs) are structured as trusts — they hold and manage assets for the benefit of members.
FAQs Answered About Living Trusts.
Most people are confused about this.
What Assets Are Held By Trusts?
Commonly it’s cash/bank accounts, real estate, and investment accounts/stocks. It might also include things like valuable artwork, jewellery and other collectibles. It can also include digital assets like cryptocurrency.
What Are The Main Benefits Of A Living Trust?
Tax minimisation is a major benefit. Additionally, you might choose a trust over other types of arrangements to take advantage of:
- Greater privacy, as it’s a private agreement. The trustee/s can be separate from the person/people who really own the trust or benefit from its assets.
- Less compliance compared to companies that have to comply with ASIC regulations, lodge annual reports and organise independent audits.
- Protecting assets from creditors and lawsuits, or people that might target beneficiaries (e.g., scammers, gold-diggers), because the assets aren’t directly held.
You can start to see why rich people love them!
Can I Buy A House Under A Family Trust?
Yes, property can be purchased using a family trust provided that’s possible within the rules of the trust deed. It could be a family home you’ll live in or an investment property.
A number of Australian banks and lenders will provide home loans to family trusts, but it can mean that all the trustees and beneficiaries need to provide identification and paperwork to complete the loan.
Different banks will also have different eligibility criteria.
Who Uses Trusts And Why?
Australian Tax Office statistics show there are 1.49m trusts and super funds in Australia, compared to 1.18m companies.
Above: ATO data from the 2021-22 income year shows the number of trusts and super funds in Australia is greater than the number of companies.
ATO data also shows the main type of trust established in Australia is discretionary/family trusts, which account for more than 80% of all trusts (2021-22 income year).
Important!
Depending on the trust deed, a family trust may not need to distribute all of its income annually, but that’s typically the goal.
Director of HLB Mann Judd advisory firm, Helena Yuan, said splitting the trust’s income across a family group can result in overall tax savings:
Beneficiaries pay the relevant personal tax rate via their individual tax returns, rather than the corporate tax rate.
Company Vs Trust Structure Explained.
Legally speaking, a trust is a relationship.
It’s an agreement between the trustee/s and the beneficiaries — and trustees are personally liable for all debts.
Whereas companies are legal entities.
Chartered accountant Clinton Gibson from Carbon Group explains one key benefit of that:
Gibson said that while trusts can be advantageous for minimising tax — particularly in relation to capital gains tax concessions — they can be expensive to operate, inflexible and result in tax burdens if managed poorly.
For example, you’ll pay the highest marginal tax rate on any trust profits that are not distributed to beneficiaries.
| Trusts | Companies |
|---|---|
| Governed by a trust deed, which defines the rules and timespan. | Controlled by members and/or shareholders. |
| Run by the trustee/s, which can be a person or a company (known as a corporate trustee). | Run by directors and managers (who can be voted out or fired). |
| Lifespan of 50-80 years usually. | Potentially lasts forever. |
| Trustee/s personally liable for all debts (limited liability if its a corporate trustee). | Company, not you personally, is liable for business debts (your personal assets are protected). |
Do You Need A Family Trust?
Trusts are popular but not necessarily the most convenient or cost-effective option. It may also not be worth the hassle if you don’t have significant assets to include in the trust.
They can cost thousands to establish and you’ll likely need ongoing professional support to ensure you’re managing the trust’s investments well, and meeting all your obligations as a trustee.
If you’re considering creating a trust, its best to get professional financial advice before you act.
Jody
