*Many people struggle with this. Family trusts get real technical real quick. This is something people are always asking, novices and advanced ones too. Do you know the parties in a trust? Find out below*
Trust Parties: Settlor, Trustee, Beneficiaries
Introduction
Discretionary and Family trusts are a versatile and widely used structure in Australian estate planning and asset management. Understanding the key parties involved in a discretionary trust—settlor, trustee, and beneficiaries—is really important so you can effectively establish and manage these trusts. Each party has distinct roles, responsibilities, and rights, which collectively ensure the trust operates smoothly and achieves its intended purposes. This article looks into the roles and functions of the settlor, trustee, and beneficiaries within the context of discretionary trusts in Australia. But, don’t forget – you need to get professional advice before doing anything on your own. These articles (And anything else you find online) can only give you an overview and are definitely not self-help guide of any sort.
1. The Settlor
The settlor is the person who establishes the trust by transferring assets into it. While the settlor plays a critical role in the creation of the trust, their involvement typically ends after the initial transfer of assets. I have seen deeds where the accountant was the settlor.
Role and Responsibilities
- Creation of the Trust: The settlor creates the trust by transferring assets (such as cash, property, or other investments) to the trustee to be held on behalf of the beneficiaries.
- Trust Deed: The settlor is responsible for drafting the trust deed, which outlines the terms and conditions under which the trust operates. This document specifies the powers and duties of the trustee, the rights of the beneficiaries, and the trust’s objectives.
- Initial Asset Transfer: The settlor’s primary responsibility is to transfer the initial assets into the trust. This transfer must be irrevocable, meaning the settlor cannot reclaim the assets once they are placed into the trust.
Limitations
In Australia, the settlor must not benefit from the trust to avoid any conflicts of interest and potential tax implications. The settlor’s role is generally limited to the establishment of the trust, and they cannot act as a trustee or a beneficiary of the trust they establish.
According to Ford and Lee, “The settlor’s involvement in a discretionary trust typically ceases after the trust is established and the initial assets are transferred” (Ford and Lee 67).
2. The Trustee
The trustee is the individual or entity responsible for managing the trust according to the terms set out in the trust deed and relevant Australian laws. The trustee has significant fiduciary duties and must act in the best interests of the beneficiaries. This part is super important. The devil is in the detail. Please read this carefully.
Role and Responsibilities
- Fiduciary Duty: The trustee must act honestly, in good faith, and in the best interests of the beneficiaries. They are required to manage the trust’s assets prudently and avoid conflicts of interest.
- Asset Management: The trustee is responsible for managing the trust’s assets, including investing funds, maintaining property, and making decisions about asset allocation.
- Distributions: One of the trustee’s primary duties is to make discretionary distributions of income and capital to the beneficiaries. The trustee has the authority to decide who receives distributions, how much they receive, and when they receive it, based on the beneficiaries’ needs and circumstances.
- Record Keeping and Reporting: Trustees must maintain accurate records of the trust’s transactions and provide regular reports to the beneficiaries. This includes financial statements, distribution records, and tax filings.
- Compliance: Trustees must ensure the trust complies with all relevant laws and regulations, including tax obligations and state-specific trust laws.
Types of Trustees
Trustees can be individuals, such as family members or friends, or professional entities, such as trust companies or legal firms. Each type of trustee has its advantages and considerations:
- Individual Trustees: Often family members or close associates, individual trustees may have a personal interest in the well-being of the beneficiaries. However, they may lack the expertise required for complex asset management and compliance tasks.
- Professional Trustees: These are organizations that specialize in trust management. They bring professional expertise and impartiality but may charge higher fees for their services.
Many family trusts have corporate trustees in Australia too, for added protection and for tax planning purposes. According to Lewin on Trusts, “Trustees play a critical role in the administration of discretionary trusts, requiring a thorough understanding of their fiduciary duties and responsibilities” (Lewin 110).
3. The Beneficiaries
Beneficiaries are the individuals or entities who may receive benefits from the trust. In a discretionary trust, beneficiaries do not have a fixed entitlement to the trust’s assets; instead, they rely on the trustee’s discretion for distributions.
Rights and Expectations
- Discretionary Entitlements: Beneficiaries have no automatic right to receive income or capital from the trust. Distributions are made at the trustee’s discretion, based on the trust deed’s terms and the beneficiaries’ needs.
- Right to Information: Beneficiaries are entitled to information about the trust’s administration, including financial statements and details of distributions. This transparency helps beneficiaries understand their potential entitlements and the trust’s management.
- Protection of Interests: Beneficiaries can expect the trustee to act in their best interests, managing the trust’s assets prudently and making fair and equitable distributions.
Types of Beneficiaries
Beneficiaries can be broadly categorized into two types:
- Primary Beneficiaries: These are the main individuals or entities intended to benefit from the trust. They often include family members, such as the settlor’s children or grandchildren.
- Secondary Beneficiaries: These may include other relatives, friends, or charitable organizations that may receive benefits if the primary beneficiaries’ needs are met.
Waters notes, “Beneficiaries of discretionary trusts rely on the trustee’s judgment and discretion for their entitlements, underscoring the importance of clear communication and trust governance” (Waters 134).
Legal and Tax Implications for Trust Parties
Understanding the legal and tax implications for each party involved in a discretionary trust is crucial for effective trust management.
Settlor
- Tax Considerations: The settlor must ensure that the initial transfer of assets into the trust does not result in adverse tax consequences. They should seek professional advice to navigate any potential tax implications.
Trustee
- Fiduciary Duties: Trustees have significant legal responsibilities, including adhering to fiduciary duties, managing assets prudently, and ensuring compliance with relevant laws.
- Tax Obligations: Trustees must comply with tax reporting requirements, including lodging annual tax returns and providing distribution statements to beneficiaries. They must also manage any tax liabilities arising from the trust’s income and capital gains.
Beneficiaries
- Taxation of Distributions: Beneficiaries must include their share of the trust’s income in their individual tax returns. The income retains its character (e.g., interest, dividends, capital gains) when distributed to beneficiaries.
- Rights to Information: Beneficiaries have the right to request information about the trust’s administration and financial performance, ensuring transparency and accountability.
Conclusion
Make no mistake. Understanding the roles and responsibilities of the settlor, trustee, and beneficiaries is essential for the effective management of discretionary trusts in Australia. Each party plays a crucial role in ensuring the trust operates smoothly and achieves its intended objectives. The settlor establishes the trust and transfers the initial assets, the trustee manages the trust and makes discretionary distributions, and the beneficiaries rely on the trustee’s judgment for their entitlements. By navigating the legal and tax implications associated with each role, trust parties can optimize the benefits of discretionary trusts while ensuring compliance with relevant laws and regulations. With proper planning and professional advice, discretionary trusts can provide robust solutions for managing and protecting assets in Australia. As in, you need to contact us before doing anything. As you have probably guessed by browsing our site, we are “big” on trusts.
Bibliography
Ford, H.A.J., and Lee, W.A. Principles of the Law of Trusts. 4th ed., Thomson Reuters, 2017.
Lewin, Thomas. Lewin on Trusts. 19th ed., Sweet & Maxwell, 2015.
Waters, Donovan W.M. Waters’ Law of Trusts in Canada. 4th ed., Carswell, 2012.