In 2016 there were well over 800,000 trusts in Australia with a total of assets over $3 trillion. Compare that to the 24 million people living in Australia at the moment and it is obvious we like using trusts. But what is a trust? What makes a trust? And what are the elements of a trust?
Elements of a Trust
We went to see Paul Mackenroth of Cleary Hoare in Brisbane to find an answer. And he kindly agreed to walk you through the elements of a trust. Above you will find the interview with Paul. He outlines the elements of a trust much better than we ever could. Here are just some notes.
To listen while you drive, walk or work, just access the episode through a podcast app on your mobile phone.
Trust
A trust is not a separate legal entity, but just a fiduciary relationship.
Fiduciary Relationship
There is no legal definition of a fiduciary relationship. It can overlap with other relationships, for example contractual relationships. The fiduciary undertakes to benefit someone else and to not cause detriment to that person.
The Three Certainties
A trust needs a trustee, at least one named beneficiary and clearly defined trust property.
Discretionary Trust
There is no legal definition of the term ‘discretionary trust’. It is a descriptive phrase. The trustee usually has complete discretion – hence the name – as to how they distribute the income and / or capital among the beneficiaries.
In practice, modern trust deeds usually have one or several named beneficiaries and then also classes of beneficiaries.
Rule Against Perpetuities
The rule against perpetuities is centuries old and is a public policy to avoid trust property being locked up in a trust indefinitely. A breach of the rule against perpetuities used to void the trust from inception.
However, all states and territories with a rule against perpetuity – South Australia has no rule against perpetuity – now apply the ‘wait and see’ rule.
Wait & See Rule
The wait & see rule means that you don’t “judge” at inception of the trust, but wait and see whether the trust vests within the statutory period. And if it doesn’t vest within the perpetuity period, then it becomes invalid from the end of this period, not from inception.
Discretionary Beneficiaries
A discretionary beneficiary just has a “right to be considered”, but no proprietary right in the trust property.
That right is more precisely defined as a right to ensure the Trustee is adhering to its duties in the context of the trust deed. So the trust deed determines what duties the trustee has and hence what rights the beneficiary has against the trustee.
The duties of trustees are covered in episode 84.
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Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.