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Different types of trusts can be created by your Will, depending on the benefits you wish to achieve or the concerns you wish to address. Depending upon the circumstances:
If you believe the beneficiary (spouse or child) is capable of managing their inheritance then it’s common to use a discretionary trust and nominate the beneficiary as the trustee.
This enables the beneficiary maximum flexibility in the management and control of their inheritance whilst at the same time providing the taxation benefits and asset protection benefits afforded by the trust.
If for some reason you wish to restrict the control your beneficiary has over their inheritance you can:
- Add a third party as a joint trustee along with your beneficiary, but still use a discretionary trust ( this option is only appropriate in a limited number of situations).
- Use a capital protected trust controlled by someone other than the beneficiary. These are designed to provide for beneficiaries who have difficulties managing moneys.
Special Purpose Trusts
Other special forms of trust (some with special taxation relief) are available. For example, trusts set up for a disabled person or to fund education of children may qualify for special taxation and Centrelink treatment.
Most common trust structures
The main features of the two most commonly used trust structures are:
Discretionary Trusts (created by your Will):
- Allows the beneficiary to use, invest, change and control assets freely.
- Generally the beneficiary (or their nominee) is also the trustee of their own trust. A third party can be appointed trustee in place of, or in addition to, the beneficiary where there is good reason. Examples include where the beneficiary is facing bankruptcy, matrimonial problems or has limited capacity to manage their own finances.
- Generally no practical restrictions are placed on how the trustee is to manage or maintain the assets, although the trustee does have legal duties and obligations that must be complied with. The trustee can dispose of all assets as he/she see fit. Once you leave the assets to a beneficiary using this type of trust, the trustee/beneficiary will have total control, unless restricted through the intervention of a third party trustee whose consent is required.
- This type of trust provides maximum flexibility for tax purposes.
- Provides varying degrees of protection of assets for your beneficiaries from third parties in the event of bankruptcy or family breakdown.
Capital Protected Trusts (created by your Will):
This type of trust is designed to protect and preserve assets for the benefit of a beneficiary or for future generations.
They are often used where:
- there is a concern that the beneficiary is unlikely to be able to manage their own financial affairs or are under the adverse influence of a third party; or
- you wish to maximise the chances that assets will survive the beneficiary for the benefit of a subsequent generations.
A protective trust enables you to pre-determine some degree of control or influence over the way the assets can be managed, used and accessed by your beneficiaries.
Terms of such trusts vary;
- Some provide for an income stream to the beneficiary with no access to capital.
- Some empower the trustee to provide for the education, accommodation, maintenance and betterment of a beneficiary but does not allow access to capital and perhaps very restricted access to cash
The trustee will be a third party, not the beneficiary. Commonly the trusteess are other family members, lawyers, accountants or trustee companies.
The information contained in this fact sheet is general in nature and should not be relied upon as legal advice. Legal advice should be sought for specific matters. If you have any questions please call us to speak to one of our specialists.