Source: Wealth Creator Magazine Sep/Oct 2006

Function of a trust

The basic function of a trust is to separate control and ownership. The result is that asset protection is possible and profits are distributed in the most tax effective way.
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What is a Trust

Source: Wealth Creator Magazine Sep/Oct 2006

What is a Trust

There is no 'one-size-fits-all' type of trust. The type of trust you use depends on many factors, such as type of asset or business, financing, income type, marriage status, susceptibility to being sued - just to name a few.

While it is not possible to cover every type of trust in this article we will explain what a trust is. Trusts and their usage become unnecessarily complex due to this lack of basic understanding.

A trust is basically an agreement or promise. A person or company agrees to hold assets for the benefit of another. The one who holds the assets is called the trustee; those who benefit are called beneficiaries. (See figure 1.)The trustee has legal control, which is legal title only. (A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership, such as income or usage). It's the trustee's name that appears on all legal documents, bank accounts, etc.

The beneficiaries are not mentioned on such documents and have beneficial ownership. This allows a person to enjoy the benefits of ownership including usage, income, profits, etc. - even though legal title is in another name. Therefore the beneficiaries are entitled to the assets and profits of the trust.

The basic function of a trust is to separate control and ownership. The result is that asset protection is possible and profits are distributed in the most tax effective way.

When you establish a trust of your own, you have both legal control and beneficial ownership. Most people don't separate the two; they think they are one and the same, even though they are not.

Ownership plays a key role in asset protection and the tax system. This is why a player will endeavour to own nothing and control everything!

Business Asset Protection
It's a sad fact that certain industries and professionals are more susceptible to litigation than others. While we certainly recommend asset protection for every business owner, we don't recommend the following asset protection for every business. Professionals such as doctors or businesses with a considerable amount of value in equipment or intellectual property are examples of businesses that should consider some form of asset protection. As a note, before considering any asset protection, one should have adequate insurance as a stop-gap.

With a business that has a tremendous amount of value in machinery, equipment or intellectual property, these items should be held separate from the trading entity. Figure 2 is an example.
If the professional or business is sued by either an employee or a client, the assets are protected because they are owned by a separate entity and used under a licence agreement.

In such a circumstance, all the business owner does is wind up the trading company, establish a new one and re-establish a new license agreement.

The type of trust used depends on your personal situation. The point to note is: Business assets should be protected in a separate entity, especially in highly litigable industries. With a business or investment - keep it growing and protected.

 

Written by:

Tony Melvin & Ed Chan are authors of How to Legally Reduce Your Tax … Without Losing Any Money! available in all good bookstores. Tony & Ed are also directors of Chan & Naylor Australia, one of the fastest growing accountancy practises in the country. For more information visit www.chan-naylor.com.au