No investment structure in Australia is as popular, but least understood, as the investment in trusts. Many Australians take it to be a preserve of the rich, a belief that locks them out of the benefits of investing in them.
Contrary to the misconception, trusts are an investment that can protect assets, whether personal, family or business. And they’re not only for the wealthy; even the average person can invest in them. You would need to understand them in detail, though, for you to make an informed choice on which trust to invest in. They’re of different types, each with their unique characteristics, much like living entities.
- What Is a Trust Fund?
The term “trust” is to refer to the different investment structures whereby an individual or a company ( referred to as a trustee) holds or manages the assets of someone for the benefit of another( the beneficiary). The person who transfers the assets r is known as the “settlor,” and can be anyone; from a relative to a lawyer or even an accountant. The settlor doesn’t have direct control of the assets, which is why they can be anyone. The assets that a settlor transfers to the trustee can take any form; bonds, stocks, real estate, cash and other forms of asset. Each type of trust has its procedures and regulations
- Why Invest in a Trust?
Investing in a trust can effectively guard the asset of the settlor. On transferring assets to the trustee, the settlor is deemed to no longer own them. Creditors cannot, therefore use the assets to settle debts. They also cannot be taken away by relatives in case property disagreements. Once the assets are given to a trust, it means no one can access them whether in good or bad faith, providing a safe way to keep your assets yours for life, whether business or family assets.
Other Benefits of Trusts Are:
- Guards family property
- Low costs; one does not need to keep accounts for properties
- Prevents misuse of assets especially, for the compulsive spender.
- Helps one to manage pension funds while one is in gainful employment
- Low tax; trustees can distribute income in the lowest tax rates or brackets possible
- Helps to manage assets on behalf of those who are too young or are handicapped in any other way
What are the different types of funds?
Trusts in Australia generally fall within these categories
1. Family or Discretionary Trust
Discretionary Trust gives the trustee power to decide on the income distribution. The rust best suits families that own business establishments that are family run, or any other assets that earns them regular income. The trust is easy to both set up and operate. With it, tax contributions are shared amongst member of the family thereby lightening the burden of one person having to bear it all. Income is evenly distributed among the members, and most of all, the family business well guarded against being taken away as would happen in case of the family going bankrupt.
2. Unit or Fixed Trust
Unlike the discretion trust, the unit trust doesn’t bestow power on the asset holder( trustee) to determine how to distribute income to the trust beneficiaries. The amount is already indicated in the trust agreement and each beneficiary has own amount according to the number of units and class indicated in the trust. Beneficiaries may, therefore not receive equal amounts at the end of year income distribution. The trust is mostly used in cases where the beneficiaries are from different families.
3. Hybrid Trust
The hybrid trust, as its name suggests, is a mix of both the family and the unit trust. The trustee hold the power to flexibly distribute income from the trust as happens in the discretion trust. The income is not equally distributed, though, but according to how many units the particular beneficiary holds in the trust( the characteristic of the fixed trust). The trust is most popular with with businesses and other active investment such as real estate. Hybrid trusts offer tax benefits in income tax and gains from capital, which is why it’s common with businesses.
Trust funds are a great way to keep assets safe and to give lifelong assurance of ownership. They are simple to operate and you dont need huge amount of money.