What is a trust?A trust is a legal relationship between two parties, where one party (i.e. the trustee) holds the legal title to assets for the benefit of the other party (i.e. the beneficiary). Should I hold my family assets and investments under a trust?A trust is not a separate legal entity and cannot sue or be sued, although the trustees or beneficiaries may on its behalf. The advantages of a trust are: If the trust is a discretionary trust (sometimes referred to as a family trust), it can also offer tax efficiency through optimising income and capital distribution to the beneficiaries. Should I structure my business as a trust?While a trust can protect the business’ assets for the benefit of the beneficiaries, it can also limit the business’ expansion as: - the business cannot retain its profits without being taxed at the highest marginal tax rates; and
- the business cannot distribute its losses to the beneficiaries. Thus, the beneficiaries cannot utilise those losses to offset against their other income.
Who manages and administers a trust?The trustee holds the legal title to the trust’s assets and manages and administers the trust, including distributing trust proceeds according to the trust deed to the beneficiaries. The trustee can sue and be sued on matters connected to the trust. Who can be a trustee?The trustee can be an individual who is 18 years of age and above and not under a legal disability. The trustee can also be a corporation (i.e. a corporate trustee). The trust is then effectively managed and administered by the director(s) of the corporate trustee. Should a trustee be an individual or a corporation?The trustee is personally liable for the trust’s liabilities. It is not unusual for trusts to have corporate trustees, to limit the trustees’ liabilities to the assets of the corporations. Corporate trustees are usually shell corporations with no or nominal assets. Other advantages of a corporate trustee are: - the corporate trustee can exist indefinitely unlike an individual trustee who will eventually die; and
- legal ownership of the trust’s assets does not have to be changed when there is a change in the director(s) or shareholder(s) of the corporate trustee whereas legal ownership of the trust’s assets has to be changed when there is a change in an individual trustee.
Can I control a trust without being a trustee?If the trust has a corporate trustee, the shareholder(s) of the corporate trustee can effectively control the trust by exercising the power to appoint or remove the director(s) of the corporate trustee. The trust deed can also provide for you to be an appointer, to appoint or remove the trustee of the trust. In this way, you can have ultimate effective control of the trust. Can I be the settlor (i.e. the creator) and a trustee of a trust?Yes, but it is not advisable as it may raise questions whether the settled sum was properly gifted to the trust and hence, the trust may be found not to be validly created. Can I be the settlor and an appointer of a trust?Yes. Can I be the settlor and a beneficiary of a trust?Yes, but there are tax implications. Tax advice should be taken. Can I be a trustee and a beneficiary of a trust?Yes, provided the trust has more than one trustee and more than one beneficiary. If you are the sole trustee and the sole beneficiary, you hold both legal and beneficial interests. As these interests merge together, no trust relationship can arise. If the trust has a corporate trustee, you can be the sole shareholder and the sole director of the corporate trustee, and be the sole beneficiary of the trust. Can I be an appointer and a beneficiary of a trust?Yes. Can another trust be a beneficiary of a trust?Yes, provided the beneficiary is the trustee of that other trust and is acting in its capacity as trustee of that other trust. Can a trustee be based overseas?Yes, but there are tax implications. Tax advice should be taken. What happens if a trust’s debts exceed its assets?If the trust’s debts exceed its assets (i.e. the trust is insolvent), its assets will be used to pay off its debts in priority according to the law and the beneficiaries will receive nothing. The trustee’s rights usually take priority over other creditors. The trustee also has a right of indemnity from the trust’s assets which is protected by an equitable lien over those assets. What is the lifespan of a trust?A trust has a lifespan of 80 years. Is stamp duty payable on the creation of a trust?Yes. The above content is general in nature and is not intended to address your specific circ*mstances. We welcome the opportunity to have a chat with you and assist you with your legal issues or concerns. Talk with us and see the difference. Updated June 2019. |
FAQs
The major disadvantages that are associated with trusts are their perceived irrevocability, the loss of control over assets that are put into trust and their costs. In fact trusts can be made revocable, but this generally has negative consequences in respect of tax, estate duty, asset protection and stamp duty.
What is the 5 or 5000 rule in trust? ›
This term refers to a Trust agreement that allows Beneficiaries to withdraw $5,000 or 5% of the Trust's assets annually, whichever amount is greater. This tool is designed to provide the Beneficiaries with a certain level of flexibility and control over the Trust, without compromising its overall intent or structure.
Why would a trust fail? ›
Based on our experience of more than thirty years in practicing Trust law, the most common reason Trusts fail is that they are not funded. The purpose of a Trust is to manage the assets held in it. In order for the Trust to do it's job, the assets need to be in the Trust.
Is it difficult to contest a trust? ›
As mentioned, it may be very difficult to successfully contest a trust if you simply disagree with how the trust assets were divided up or you believe you should have been included in the trust but weren't.
What's the downside of a trust? ›
What Are the Disadvantages of a Trust in California? Trusts are costly to create. Creating a trust without an attorney may be less expensive, but doing so leaves the trust much more vulnerable to trust contests and other legal litigation. It is also more time-consuming to properly set up a trust than to create a will.
What is the bad side of trust? ›
One of the most significant disadvantages of a trust is its complexity. Generally, trusts use very specific language, which can be difficult to understand for those who are not often involved in estate law. Because trusts were once written in Latin, there are many legal terms that still carry over.
At what net worth should you consider a trust? ›
It's difficult to pinpoint exactly what net worth warrants a trust. But, as a general rule, if your assets are valued over $100,000, you should seriously consider one. Furthermore, if you want to be absolutely certain that your estate is distributed according to your wishes, you need a trust.
Who has the most power in a trust? ›
So, who has the most power in a Trust? Ultimately, the Trust Maker holds the most power initially because they are dictating how the Trust is to be administered. This is why you must be careful when establishing a Trust—especially an Irrevocable Trust.
What is the average trust balance? ›
While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000. That's certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth.
What cannot be held in a trust? ›
Unfortunately, revocable trusts don't allow you to place several types of assets within them. Specifically, you can't place the following assets in a revocable trust: Retirement assets, such as a 401(k) or IRA/individual retirement account. Health savings accounts (HSAs) and medical savings accounts(MSAs)
When you set up a trust, you will have to pay the cost of preparation, which can be higher than the cost of preparing a will. Also, a trust doesn't provide special asset or estate tax protection.
What makes a trust defective? ›
When a grantor is considered an owner of the trust for income tax purposes but has relinquished rights to the assets in the trust in a way that allows the grantor to not be considered the owner of the assets for estate tax purposes, this is called an Intentionally Defective Grantor Trust.
What makes an irrevocable trust invalid? ›
The document creating the trust doesn't meet the legal requirements; The trust was created or modified by fraud; The creator of the trust lacked the capacity to create the trust; or. Someone exercised undue influence over the creator of the trust.
How is trust violated? ›
Trust can be destroyed through dishonesty, secrecy, lies, contempt and rejecting behaviours, both overt and covert. For example, lies about money, family background, addiction, or other hidden motives can diminish faith in a partner's reliability for a long-term commitment.
Can you cut someone out of a trust? ›
In a revocable trust, the grantor (the person who creates and funds the trust) can remove a trustee without permission from anyone else. To do so, they should formally notify the trustee that their services are no longer needed. The grantor can then name a new trustee.
Why do rich people use trust funds? ›
A measure of protection. Trusts can help ensure that your children, grandchildren, cherished friends or other loved ones receive their inheritance if you divorce or remarry. They also can help shield assets if you or your heirs are in professions that come with a high risk of litigation.
Is it safe to put your money in a trust fund? ›
No matter your financial situation, setting up a trust is an excellent financial tool for ensuring your estate and beneficiaries are well served.
Does trust fund money run out? ›
The trust funds from which Social Security benefits are paid are projected to run short of money by 2035, one year later than estimated last year by the Social Security Board of Trustees.
What is the problem with trust? ›
People with trust issues often assume someone will betray them soon enough, despite how honest they have been in the past. They're overly protective. Those with trust issues are usually very protective of their loved ones, out of fear that they will become disloyal. They distance themselves from others.
