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What is the best trust suited for me?

Discussion in 'Investing Strategies' started by Crusher, 8th Nov, 2009.

  1. Crusher

    Crusher Well-Known Member

    11th Jul, 2008
    Newcastle, NSW
    Over the past few weeks i have been researching the idea of trusts and would like to hear some opinions from here.

    What i would like to do is begin something similar to an investment club

    I have spoken to some friends, family, work colleagues who are interested in the idea, and what we've come up is:

    say 10 or so people, contributing around $100 a month to invest in. We will consult with professionals as to some strategies to run with and review them periodically.

    ive read into, unit trusts, discretionary trusts and hybrid disc trusts.. so so questions i have in relation to our position:

    a) For a unit trust, relatively low amount of $$ at this stage, is it that ridiculous to have the trustee as a person, rather then a company?

    b) a unit trust being a 'fixed trust', is that something like 80% profit to be distributed to the beneficiaries and 20% to the fund for management costs, accountants etc..?

    c) for a discretionary trust, can anyone be involved, or only family members? such a friend of the principal beneficiary?

    d) each beneficiary will receive a statement of income that is to go on their own personal tax return? rather then the trustee be left with the bill?

    e) the trustee is to open a bank account in their own name and conduct the day to day runnings of the trust from this account, is this normal practice?

    just a few rather simple questions, any discussion is appreciated.
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    Not sure of the ramifications of using a person as trustee rather than a company - I'll have to leave that one to the accountants.

    Generally I think you would just pay all expenses (accounting, bank fees, management fees, etc) and then split the remainder of the profit between the unitholders. Only profit needs to be distributed, and any management fee you agree to pay the manager is an expense that reduces the net profit.

    There are discretionary trusts and then there are family discretionary trusts (or family trusts). I think the main difference is that there are some tax benefits to be had from family trusts.

    The key to the trust is all in the trust deed - that outlines exactly what the trust is allowed to do, and exactly who the beneficiaries are. Many trust deeds are written to allow a very broad range of beneficiaries, since adding or changing beneficiaries later can cause the trust to be resettled and possibly re-stamped (a lot of unnecessary cost). Family trusts generally define a lineage to whom benefits can be distributed, but you can also define other beneficiaries, although there may be implications in doing so.

    For an ordinary discretionary trust, I believe you could define pretty much anyone as a beneficiary ... I read the other day that many financial planning firms are operated as discretionary trusts.

    I'm not an accountant, so I'm not fully aware of the implications of various structures - this is a complex question that really does need professional advice.

    In general though, I think you'd want to stick to a unit trust so that everyone knows exactly what they are entitled to (based on their unitholding).

    Yes, unless the trust fails to distribute income (which will see it pay penalty tax at the highest marginal rate).

    Generally, the trust does its tax return first and then you work out the distribution for each beneficiary and provide them with a statement showing exactly how much they received and the nature of the income (ie normal income vs franked dividends vs capital gain vs foreign income, etc).

    Note that you don't necessarily need to actually pay the money out - you could make the distribution a "book entry" (meaning the beneficiary still has to pay tax on it, but perhaps loans the money back to the trust so it can reinvest it, or acquires additional units in the case of a unit trust?). Just be aware that the beneficiary has a legal right to the distribution and can demand that it be physically paid - you can't arbitrarily withhold a distribution from them.

    My family trust has a corporate trustee.

    I have a business bank account in the name of "My_Trustee_Company Pty Ltd as trustee for My_Family_Trust", which the trustee operates on behalf of the trust. This is also the name that appears on the cheques. All transactions go through this account.

    It is the "as trustee for" part which is important - when you open a bank account, you will be asked on the form whether the account is operated in trust for someone else and the name of the trust you are acting as trustee for.

    It is important to keep the trust banking separate from your personal banking to ensure there is no confusion about exactly who owns the assets. For example, if you buy real estate, the name of the trustee is what appears on the title deed, not the name of the trust! Unless you have documentation (perhaps a company minute), or a clear paper trail (eg money passing through the trust bank account), there can be a question as to whether it is actually owned by the trust or not.