Frequently Asked Questions
You need to check the relevant legislation in your State and Territory, as the rules are different in each jurisdiction.
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What are the main uses and benefits of a discretionary trust?
- Discretionary trusts are most commonly used for:
- tax benefits;
- land holdings;
- family financial provision;
- protection of assets; and
- estate planning.
- Discretionary trusts are generally more effective as a holding entity for investments and for commercial real estate or other larger fixed assets. Capital gains tax is charged on the disposal of assets except in the case of personal assets and the principal place of residence. Trusts usually obtain a 50% exemption where all beneficiaries are individuals.
- As trust assets are held for the benefit of beneficiaries property held on trust cannot be taken in bankruptcy proceedings against the trustee subject to certain exceptions.
- When distributing income among potential beneficiaries the trustee also has discretion to consider how distributions to beneficiaries might impact their annual taxable income.
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What are the main pitfalls when setting up a trust?
- Difficulties may arise after a trust is established because the trust was not set up in the most appropriate way for the specific circumstances. This can occur when people establish a DIY trust by using internet templates and without seeking legal advice specific to their situation. A DIY trust will rarely meet your current and future needs without creating problems for trustees and beneficiaries in the future.
- Many family trusts are set up correctly but are not regularly reviewed by the trustee and only become an issue upon the death of a family member after many years of the estate growing in value. These situations are common and can result in family disputes.
- It is as important to seek legal advice regarding the ongoing management of a trust as it is to set up a trust correctly in the first instance. You can use our Phone a Lawyer service for a preliminary legal consultation if you think you may need legal advice.
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Can I set up a trust to avoid paying tax?
- No. Trusts cannot be set up with the intention of avoiding income tax.
- Trusts can be established for the purposes of managing your wealth and tax planning.
- Generally it will be up to the courts to establish whether the trust was for legitimate purposes or not.
- If you want to understand more about the mechanisms available for legal wealth management it is advisable to speak to a lawyer with expertise in wealth management and estate planning. You can use our free and anonymous Ask a Lawyer service to get information specific to your situation.
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What happens if a trust under which I am a beneficiary wasn't set up correctly?
- Sometimes there is a technical error when a trust is set up which makes the trust incomplete or invalid. This may not be enough to render the trust completely unenforceable.
- Where the failure of the trust would result in an unjust or unfair outcome the law of equity may find that a resulting or constructive trust has come into existence.
- A resulting trust is created when a settlor transfers the legal title to property to another person but retains the beneficial ownership of the property. The law presumes that the settlor's intention was to create a trust for the benefit of themselves and potentially other additional beneficiaries.
- A constructive trust may arise where there has been no express declaration of trust but the rules of equity consider it to be unjust not to impose the trust as between two persons who become the trustee and beneficiary.
- The rules about constructive trusts are complex. You can use our Fixed Fee Quote service to call for tenders from experienced lawyers who may be able to assist you with this.
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What kind of property can be trust property?
- Trusts were historically limited to land but now all types of property can form part of the trust assets.
- Certain types of property are subject to legal rules about how they must be transferred from one person to another such as in the case of land.
- If the settlor fails to transfer the property to the trustee correctly the trust may be found to have been improperly constituted.
- Equity would be unable to assist in this circumstance due to the maxim that “equity will not complete an imperfect gift.”
- A trusts lawyer can assist you in setting up the trust according to law and avoiding these problems.
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I have been appointed as a trustee and would like some guidance on how to administer the trust. Where can I get more information?
- The first point of reference for a trustee is the terms and conditions set out in the trust instrument or deed.
- Relevant state or territory legislation like the Trustee Act 1958 in Victoria sets out additional obligations.
- Trustees may also seek the advice of a lawyer to better understand their obligations in law and in equity. This is particularly important in the context of strained family dealings or with particularly large and complex estates.
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I am a trustee. What kind of liability do I have?
- Generally trustees are not liable to beneficiaries for any losses incurred in the management of the trust unless it is due to breach of their trust duties or fraud or negligence.
- If the trustee incurs liabilities as part of the good faith management of the trust they may be indemnified (paid back) out of the trust assets.
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What happens if the trustee is unable to perform their duties?
- A trustee will automatically be removed from their position if:
- the trustee is not sound of mind;
- the trustee becomes bankrupt;
- the trustee enters into liquidation or an administrator or receiver is appointed; or
- a court order to that effect has been made.
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I am a beneficiary and I am concerned about the management of a trust. Am I able to inspect the trust documents?
- Generally yes. Beneficiaries are able to inspect trust documents such as the trust deed and trust accounts. The trustee has a duty to provide these accounts and to inform beneficiaries of their rights.
- The trustee is under no obligation to disclose their reasons for making decisions under the trust including their reasons for appointing certain property to particular beneficiaries.
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I am a beneficiary and the trustee has not made any distributions to me. Why?
- Whether or not a beneficiary will receive a distribution from the trust depends on many things. Rules around distribution of assets and income will often be contained in the trust deed. As a beneficiary you will usually have the right to inspect this document.
- If the trust is a discretionary trust with multiple beneficiaries the trustee has discretion as to whether they make a distribution at all and if so:
- to whom; and
- in what proportions.
- Beneficiaries under a discretionary trust cannot compel the trustee to make a distribution to them. However other more general rights are still available to discretionary beneficiaries. These include:
- the right to information regarding trust management;
- the ability to challenge any breaches of duties regarding the exercise of a trustee's discretion; and
- the right to apply to the court to prevent an ineligible distribution of trust property.
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The trustee has used trust money to buy assets for their own personal benefit. What can I do?
- This is a breach of the trustee's fiduciary duty. A remedy will be available to the beneficiaries to put them back in the position they would have been in had the trustee not breached their duties.
- Such remedies may include 'tracing' the asset. This means that the beneficiaries may be able to claim against any assets purchased in breach of trust.
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When does a trust come to an end?
- There are three main ways in which a trust instrument can be terminated. They are:
- where the trust instrument has granted one or more nominated parties the power to revoke the trust;
- where the trust instrument can be terminated with the consent of all beneficiaries; and
- where the trust terminates on final distribution of the trust property to the beneficiaries.
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