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How does a trust account work?

How does a trust account work?

Money, cash

What is a trust account and why is it advisable to set up one? My Business looks into the different trust accounts to consider to maximise a family’s/company’s financial structures and future financial benefits.

Trust Accounts (or Trust Funds) are private legal arrangements where asset ownership—including cash, stocks, bonds, real estate and valuables such as antiques and works of art—is transferred to a trust and managed by a person or a group of individuals for the benefit of others.

A settlor is a person originally providing assets. Those appointed to manage the trust are called trustees, while those receiving the benefits of the trust are known as beneficiaries.

Types of trusts

Trusts is also an umbrella term for a number of financial structures bearing specific regulations, procedures, and tax rules. The following are the different types of trusts:

  • Bare trusts
  • Charitable trusts
  • Discretionary trusts
  • Fixed trusts
  • Hybrid trusts
  • Superannuation (Super) trusts
  • Testamentary trusts
  • Unit trusts

Bare trusts

A trust is a bare trust when there is no more than one trustee and one legally competent beneficiary that has complete control of the trustee/nominee, and there are no specified obligations. A nominee shareholding is a common example of a bare trust, where owners hold shares for someone else who prefers not to be named or identified.

Charitable trusts

Charitable trusts provide the vehicle for philanthropic trusts. Taxpayers are given tax deductions and concessional treatment when they contribute to such trusts. In general, charitable trusts fall into two sub-categories: private charitable foundation and charitable trusts with gift-deductible status.

Private charitable foundations are private charities that are not required to be controlled by a committee or seek donations from the public community. This subtype should only distribute benefits, money, or property to charities which are determined to carry the deductible gift recipient status.  These are also called prescribed private funds.

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Charitable trusts with gift-deductible status need to be controlled by a committee or are required to seek donations from the public. Subject to very strict and specific requirements, this sub-category must submit an application to the Australian Taxation Office (ATO) to be approved to carry the gift-deductible recipient status. They are also called public charitable trusts.

Discretionary trusts

Also known and often called family trusts, discretionary trusts are associated with asset protection and tax planning for family members. In this kind of trust, there is no fixed interest in the trust income or its property for the beneficiaries. However, the trustee can decide whether any of the beneficiaries will be entitled to the capital or income, including how much, and other relevant details.

Family trusts gain certain tax concessions and advantages, as allowed by the Australian Taxation Office (ATO). Family trusts can also provide access to taxation advantages of having all family members use their tax-free thresholds on their income tax.

Fixed trusts

Fixed trusts involve trustees holding the assets for the benefit of beneficiaries’ in a determined and fixed proportion. Each beneficiary is entitled a defined and fixed share, eliminating the need for exercising discretion.

Hybrid trusts

Hybrid trusts both have fixed and discretionary characteristics involving special units for the fixed entitlements to income or capital over which the trustee is given the right to issue.

Superannuation (Super) trusts

Superannuation funds all operate as trusts in Australia, where the deed (or specific and relevant legislation) mandates and establishes the calculation bases for each member’s entitlement.

The trustee retains discretionary powers over the fund’s investments and the identification and selection of a beneficiary as regards to death benefits. All funds must adhere to and comply with legislation by the federal government.

Testamentary trusts

Testamentary trusts only take effect upon the testator’s death. The testator’s trust will contain terms establishing how children (who have not yet reached adulthood or are differently-abled) of the deceased testator will be provided for upon the testator’s death.

Unit trusts

Unit trusts are fixed trusts where the beneficiaries and each of their interests are determined and identified by holding units, similar to companies that issue shares to shareholders. Beneficiaries are also called “unitholders”. Investment trusts, joint ventures, and property are usually structured as unit trusts. By transferring units to a buyer, beneficiaries are able to also move and transfer interests.

Tax treatment over unit trusts largely depend on the activities, size, and scope of each specific unit trust. here are no legal promulgations that mandate and set a specific limit to the number of units and unitholders in each unit trust.

Setting up a trust account

Setting up a trust account is always advisable to enjoy a lot of financial benefits.

Setting up a family trusts in Australia

Australian family trusts are basically discretionary trusts, which was already discussed in the section “Types of trusts” above. Setting up a family trust is distinctly from other trusts, however.

The following are the steps you need to take in setting up a family trust:

  • Determine and identify a trustee
  • Draft and compose the trust deed
  • Settle and finalise the trust deed
  • Agree to the terms and sign the trust deed
  • Apply for an Australian Business Number (ABN) or a Tax File Number (TFN)
  • Open bank account for the trust

Consult with and engage the services of a trusted lawyer with proven expertise on family trusts if uncertain on the processes or requirements involved. Sound legal advice could help set up a family trust that maximises both its current and future benefits.

Real estate trusts in Australia

Australian real estate trusts enable real estate and other agents to set up an interest-bearing account where trust money is held on behalf of a client for a period greater than 60 days or an extended period of similar length.

To set up a real estate trust, gather and submit the necessary documents and requirements below:

  • Agent’s licence (a copy of and other entailing sub-requirements may be required depending on the state or territory)
  • Personal information: name, address, birth date, and profession/occupation
  • Name of the account and all necessary details
  • Names and all other relevant details of all signatories to the account
  • Any other name by which any signatories may be known as (maiden name, popular name, etc.)
  • Name, address, birth date, and any other relevant information on any director and/or authorised individual of the company/business organisation the account is held in
  • Tax File Number (TFN)

Trust accounts can help individuals conveniently structure financial affairs, maximise tax benefits and other present-time advantages, and focus on future financial benefits and security.

NB: This information is for background only, and does not constitute financial advice.

How does a trust account work?
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