• If you intend to establish a trust the following guide will assist you in understanding the basic requirements. Legal advice specific to your situation from an experienced lawyer is always recommended. If you intend to set up a trust our free Find a Lawyer directory may help put you in touch with the assistance you need.

• This chapter will focus on the most common method of establishing a trust which is often described as an 'express trust.’ An express trust is one that the settlor intends to create and that complies with all legal formalities.
• First you should be clear on the purpose of your trust. This involves asking yourself what you want to achieve. The purpose for which you want to establish a trust will influence:
  • the way you set it up including the terms of the trust deed;
  • the selection of trustees;
  • the type of property held on trust; and
  • the specification of beneficiaries.
• Small differences in the way you set up your trust can have large impacts on matters such as:
  • asset protection;
  • taxation; and
  • how trust income and property are distributed amongst beneficiaries.
• Secondly you need to decide what kind of trust you wish to establish. It is advisable to consult a lawyer on this issue before you take steps to establish a trust.
• Trusts are often classified according to the degree of discretion that is given to the trustee. A trust can be discretionary or fixed. This is one of the main decisions to make when setting up a trust:
  • under a fixed trust the trust deed specifies the share of the property which each person is to receive. In this situation the trustee has no discretion as to whom the property is distributed or the amount of that distribution:
    • for example the terms of a family trust may specify that 50% of the annual trust income is to be distributed to Mary and 50% to Peter;
  • under a discretionary trust the trustee can have a discretion to decide:
    • which beneficiaries to distribute the trust property or income to; and
    • the amount to be distributed to each beneficiary.
• Discretionary family trusts are frequently the subject of disputes as there is greater potential for unequal allocations to be made between siblings and other family members. This can often cause conflict between beneficiaries or between the trustee and beneficiaries. When establishing a discretionary trust careful consideration should be given to the appointment of a trustee and the situations in which the trustee can be removed.

·         You must comply with the formalities required under the law to properly establish a trust. This will depend on many factors including the purpose of the trust and the type of trust property involved. Generally there are three certainties required to create a valid trust:

o   the settlor must intend to create a trust:

§  this is usually demonstrated by legally transferring property to a trustee or by a self-declaration to that effect in writing;

o   there must be certain (specific) trust property; and

o   there must be certain (specific) beneficiaries or a valid purpose such as a charitable trust.

·         If you intend to create a trust and wish to declare yourself as trustee you can make a declaration to this effect. This is called a trust by self-declaration. You as the settlor already hold legal title to the property therefore no transfer to a separate trustee would be required. There are generally no formal requirements unless the trust property consists of land instead of personal property. In the case of land the declaration must be in writing and signed by the settlor of the trust.

·         Trusts by transfer involve the transfer of property to a trustee to hold on trust and manage for the benefit of the nominated beneficiaries. There must be a clear declaration stating that the trustee is to take ownership of property in their capacity as trustee as opposed to taking the legal title for their own benefit. A lawyer can assist in the formulation of appropriate wording to ensure that this intention is clear.

·         Any transfer of property must comply with the statutory formalities concerning the transfer of property. Each state has legislation that deals with such transfers such as the Transfer of Land Act 1958 (Vic). If the property is not validly transferred to the trustee the trust will be unenforceable. Some examples of property which have specific requirements for transfer are:

o   land;

o   motor vehicles;

o   shares;

o   life insurance policies;

o   cheques; and

o   debts.

·         All trusts whether by self-declaration or transfer should be in writing. The most common form of creating a trust is by a trust instrument also known as a trust deed.

·         Testamentary trusts are created under a will and there is generally no additional trust instrument required.

·         A trust instrument is executed by the settlor. It sets out the rules of the trust including issues such as:

o   the nomination of beneficiaries;

o   appointment of trustees;

o   instructions on how the trust property is to be distributed;

o   the powers of the trustee; and

o   how and when the trust should be wound up.

·         In the event that a trust does not meet all the required legal formalities the law of equity may still protect the intention of the settlor to create a trust by finding that there was a constructive, implied or resulting trust. This situation is not ideal and it is recommended that you consult a trusts or estates lawyer to assist in setting up the trust to avoid any legal errors or uncertainty.