-: A trust is not a separate legal entity
but is a vehicle which is used to facilitate
the distribution of income or capital
amongst particular individuals or entities.
Under Division 6 of the ITAA 1936,
trusts basically comprise of three main principal elements
or characteristics, including trust property,
which includes both the income
and capital components of a trust.
The trustee, who holds the legal interest
in the trust property
and has an obligation to distribute the trust property
for the benefit of the beneficiaries,
according to the trust deed
and the beneficiaries, who hold an equitable interest
in the trust property, which is either fixed
or is at the discretion of the trustee.
The main types of trusts comprise of:
1) a living or inter-vivos trust,
created during a person's lifetime.
In this case, a trust settlement involves a settler
putting up a small cash amount
where, then, the property is transferred to a trust.
The trustee is then responsible for managing the property
or income of the trust on behalf of the beneficiaries.
Secondly, a trust created under a will
or upon a person's death.
The trustee, who can either be an executor, if it's a will
or an administrator, if there is no will,
will be responsible for the distribution
of the trust property or income.
Thirdly, a trust created under the operation
of the rules of law or equity.
These constructive trusts ensure that property holders
are legally entitled to hold such property or income.
A further important distinction are the different types
of living or inter-vivos trusts.
These can be divided into three main types.
Firstly, fixed trusts.
This is where each beneficiary has a pre-determined interest
in the income or capital of the trust estate.
This will usually be stipulated in the trust deed.
The fixed entitlement may also comprise a number of units
held in a unit trust.
X Proprietary Limited, Y Proprietary Limited
and Z Proprietary Limited are all unit holders
in T Unit Trust.
As per the trust deed, X Proprietary Limited
holds 30% of the units, Y, 45% of the units
and Z, 25% of the units.
In this case, the trustee will be obliged to distribute
exactly 30% of the income and capital to X,
45% to Y and 25% to Z.
Secondly, discretionary trusts.
These are the most common trusts,
where the trust deed gives the trustee the discretion
to distribute the income or capital
in the most advantageous way.
The Smith discretionary trust comprises $10,000 of income
and $15,000 of capital.
The beneficiaries comprise Jack, aged 20 years,
who has a part-time job earning $6000,
Paul, aged 50 years, who has capital losses of $15,000
and Mandy, aged 40, who has an income of $100,000.
In this case, the trustee can exercise its discretion
in the most tax effective way.
First, it would allocate all of the $10,000 income to Jack,
who, because of the tax-free threshold, would pay no tax.
Further, distribute the $15,000 of capital to Paul,
who would then soak up the capital losses,
resulting in no tax.
And finally, not distribute any income or capital to Mandy
as a result of her high income.
Thirdly, hybrid trusts.
These are a combination of both fixed
and discretionary trusts.
The common features include fixed entitlements
or units for part of the beneficiary's interests
and the balance of income and capital is distributed
according to the trustee's discretion.
To recap, the key features of any trust
comprise the trust property, trustee and beneficiaries.
The most common types of trust are living trusts,
deceased estates and those created by law or equity.
Whilst living trusts may take the form of fixed,
discretionary or hybrid,
the most common is the discretionary trust
because of its flexibility and tax planning capabilities.