Trusts

Should I have a discretionary or unit trust involved in my business structure?

In a unit trust, the income of the trust is distributed according to the units owned, in much the same way as shares in a company. Such trusts are therefore often called fixed trusts.

A trust can co-exist with any other business structure. Company, partnership and sole trader structures often operate businesses incorporating a discretionary trust for tax, asset protection and succession reasons.

With respect to tax, discretionary trusts have the capacity to distribute in a tax effective manner income unrelated to personal exertion.

A business asset can be held in a trust for the same reason it is often held in a company, namely to separate the asset from the trading risk of the business using that asset.

In terms of succession, trusts are very useful in passing the control of assets between members of a family group. As the assets are owned by the trust, not the trustee, there are no transfer costs upon a change of the trustee of the trust.

Trusts are not particularly good vehicles, however, for transferring assets outside of a family group, as the beneficiaries of the trust will generally not include the members of the family of the purchasers of the assets.

Shareholders and partners may hold their interests in a company or partnership as trustees of a trust.

What are the rights and obligations of the trustee of a discretionary trust?

A trustee is legally liable to all those with whom it deals. Trustees have a range of duties called fiduciary duties, as well as statutory duties under the Trustee Act and elsewhere. At the core of these duties is the requirement that the trustee acts prudently and in the best interests of the beneficiaries of the trust at all times. The trustee must keep proper records and accounts and ensure that the trust complies with all of its legal obligations, such as with respect to tax.

However, a trustee will normally have an indemnity from the trust fund, except, perhaps, to the extent that the trustee is negligent or fraudulent. In other words, if the trustee commits itself to a contract, it is entitled to meet its obligations from the trust fund. If it is sued pursuant to that contract, any damages payable as a consequence of such an action can, possibly subject to negligence and fraud, come from the trust fund.