In Australia, trusts are used to shelter a person’s assets. The person setting up the trust is called a “Settlor.” Discretionary trusts are some of the most popular types of trusts out there, and they’re not too difficult to set up. You basically have three parties involved in the transaction – you (the Settlor), the Trustee (the party who manages the trust), and the beneficiary (the party who receives the benefit of the trust). Here’s how you get things set up:
Step 1: Decide On A Purpose
Make a decision about the purpose for the trust and what the initial assets will be. Since trusts require a contribution to get started, you’ll have to put up some real property, money, or personal property to open the trust. Don’t worry about how much to put in at first. You can always make additional contributions once the trust is set up.
Step 2: Name Your Trustee
Make sure the person you name as a trustee is trustworthy. This is the person who will be managing the assets in the trust. He should be someone you can trust, is good at managing money and property, and is reliable. Do not name yourself. You can’t be the trustee and the Settlor. It may invalidate the trust contract – prompting a court to challenge the validity of it. In general, courts in Australia see this sort of thing as a “sham trust,” since trusts inherently have three distinct parties, not two.
Step 3: Name The Beneficiaries
You must have beneficiaries for the trust to be valid. The beneficiaries may be anyone, but keep this in mind: Beneficiaries have no legal right to any of the trust assets unless those assets are distributed by the Trustee.
Usually, Trustees and Beneficiaries are kept at an “arm’s length.” This means that the Trustee and the Beneficiaries generally don’t know each other, don’t have a prior business relationship with each other, and do not have an incentive to benefit each other – neither has an equitable or any other type of interest in the other party.
The Trustee is charged with acting in the best interest of the Beneficiary, but he must maintain objectivity and the principle of Prudence. In other words, the Trustee must manage the assets of the Trust in the same way that any prudent man would – eliminating unnecessary risks with the assets, and minimizing other adverse risks as best as possible while preserving the integrity of the assets and the Trust itself. With that said, Trustees have a lot of discretion when it comes to management and distribution of assets which are only limited by the Deed of Settlement.
Step 4: Set The Contents of the Deed of Settlement
It’s up to you, as the Settlor, to outline the basic functions and limitations of the Trustee. You must authorize which restrictions, if any, are placed on the Trustee. This includes any restrictions on asset management and distribution.
The Deed should specify the original trust assets, name the Settlor, the Trustee, and the Beneficiaries. It must also specify the rights and duties of the Trustee, how the Trustee may be replaced (if necessary), and set the rules for the operation of the Trust’s bank account.
Because all Trusts must comply with local and national laws, it’s best to have an attorney help you draft the Deed. That way, the Trust’s integrity can be maintained over time and you won’t run into problems with enforcement of the Trust contract.
Step 5: Sell Your Assets
You must get your assets into the Trust to make it valid. The way you do this is by selling your assets to the Trust using a written bill of sale. Then, have a lawyer help you draft a document to forgive all indebtedness to you by the Trust. This way, the Trust won’t have to repay you for any of the assets of the trust that you sell to it (since a trust often starts out with no money or property, this step is essential so that an actual transaction takes place and carries validity in the eyes of the law).
Step 6: Make Use Of Leases
To use the property, as the Settlor, you must have this property leased to you by the Trust. The Trustee must approve the lease for you to use the property, but often this isn’t a problem. As long as there’s a legitimate reason for the lease, it will be legally valid.
For example, you may sell your home to the Trust, but you may want to continue living there. You would have to lease the home from the trust in order to remain in the home.
Helen Akin is a financial advisor with several years of experience. In her free time, she likes to share advice with others by blogging on various websites. To learn about income protection and much more, visit the experts at Wealth Smart.