The main reasons Trusts are typically used is for tax planning and for asset protection purposes. The beneficiaries do not own property held under a Trust until it is distributed and transferred to the name of the beneficiaries.
Family Trusts (Discretionary trusts)
Discretionary trusts are often referred to as family trusts. Family Trusts, if set up correctly, can protect your pre-marital assets (assets that you have brought into the marriage).
They give trustees the discretion to distribute income earned in the trust, or capital derived from the sale of assets within the trust, to each of the named beneficiaries.
Testamentary Trusts (as part of a Will)
Testamentary trusts, are discretionary trusts established in Wills. They only come into effect after you die.
What are the benefits of a Trust?
They can be used as a means to possibly reduce tax paid by the beneficiaries from income earned from their inheritance (Testamentary Trust) and to protect the trust assets (Discretionary Trust) in the following circumstances:
Divorce/ breakdown in relationship of a beneficiary:
If a beneficiary is in a ‘shaky relationship’ (such that the marriage or a de facto relationship is going to be dissolve in time), then the assets held in a testamentary trust is to be construed as a financial resource and may have some effect on terms of the property settlement. But this is far better than the property being considered as an asset and being at the disposal of a Court order.
Many families are concerned that the spouse may remarry and divert the family assets to the new family, or use the family assets in risky or unprofitable way. Testamentary trust can be useful for families who wish to provide for their spouse and alleviates the concern.
If an intended beneficiary had a number of creditors and or is likely be at risk of being made bankrupt, or the beneficiary is in a high risk profession or business where negligence are likely, then a Testamentary Trust, especially a Discretionary Testamentary Trust will protect the trust assets by minimising its share and diverting most of the trust assets to other beneficiaries.
In their Will, most people will set up a Testamentary Trust if they have young children, children under 25 years old or children with a disability who would not be able to manage their inheritance. They will specify a Trustee to manage how the income from the Trust is to be used for the benefit of the children. This may include directions on using the money for the living expenses and education expenses of the beneficiaries until they attain a certain age.
There are also disadvantages to setting up Trusts. Contact us to discuss your requirements and determine if a Trust is suitable for your situation.