It’s your accountant’s favourite topic. But what even is a trust?

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In the entire pantheon of inscrutable, jargon-y personal finance nonsense, one term rises above all others, unparallelled in both its frequency of use and difficulty to easily comprehend.

I’m talking, of course, about trusts, something that’s somehow both your golf partner and accountant’s favourite topic, and a rare part of the money lexicon that’s firmly broken into the mainstream (see: the concept of “trust fund kids”).

In 2023, there were just over a million trusts registered in Australia according to the ATO, delivering a total business income (TBI) of almost $489.5 billion. Which is cool and all, but I hear you ask, what does any of that mean?

In essence, a trust is when a person or entity (the trustee) holds or manages assets for the benefit of others (the beneficiaries). In the case of a family trust, one of the most common forms of trusts, the trustee could be a parent, or a company owned by a parent, with the beneficiaries being the children (the “trust fund kids”, so to speak) who receive income from the trust.

Trusts can have many different purposes and functions, some of them extremely complex, but generally, they’re used as a way to save on tax, as trusts themselves don’t pay tax. Instead, each beneficiary pays tax at their own income tax rate, allowing trustees to reduce tax paid by funnelling the trust’s income to the lowest-earning (and therefore lowest tax bracket) beneficiary.

What’s the problem?

Trusts tend to get a bit of a bad rap, viewed as a way for the uber-rich to reduce their tax and do other nefarious loophole-y things, which ... actually isn’t too far from the truth. A 2017 study from the Australia Institute showed people with taxable incomes of more than $500,000 account for just 0.43 per cent of the population but receive 51 per cent of all trust distributions.

However, there are many trusts set up by Australians with relatively regular incomes, or those with family businesses, and can be suggested by accountants if your financial affairs ever get relatively complicated.

What you can do about it

So if you’ve ever wondered what a trust is, and if one would ever be suitable for you, read on:

• Types of trust: The term “family trust” can cover many different types of trusts, including discretionary trusts, unit trusts and hybrid trusts, each varying in their legal form and tax implications. “The trustee of a discretionary trust has the most broad powers in most aspects of operating a trust, whereas powers afforded to the trustee of a unit trust are limited and can be prescriptive,” says Helena Yuan, tax director at HLB Mann Judd Sydney. “Hybrid trusts have combined features of both discretionary trusts and unit trusts.” Other popular types of trusts include bare trusts and testamentary trusts, with the former being a very stripped-down, simple way to operate a trust, where the trustee holds a single asset for a set number of beneficiaries, with no active duties to perform other than passing on the asset when required. A testamentary trust is a trust that is set up in a will which starts upon death, appointing a trustee to hold and distribute the will’s assets for beneficiaries.

• Who do they suit? For a trust to be a viable option, generally you need between $100,000 to $300,000 in assets, a relatively high threshold which means they won’t suit everyone. “Trusts are often a good fit for parents with young kids, business owners and high earners who need flexibility and protection,” says Nadine Williamson, financial advisor at BlueRock. “Young singles with straightforward finances usually don’t get enough benefit to justify the extra cost and complexity.” It’s also worth noting when considering assets to put in a trust that it may not be tax effective to consider any negatively geared assets, as trusts can only distribute net trust income, not net trust loss.

• What are the ongoing responsibilities and costs? Herein lies the main drag when considering trusts, as the trustees have a number of ongoing duties, both to themselves, the beneficiaries, and the tax man. “In addition to running the day-to-day affairs, the trustee needs to ensure the trust’s income and expenses are correctly recorded, [and] also must pass an income distribution resolution before the end of a financial year and file an income tax return for the trust,” Yuan says. “When fulfilling their duties, trustees must comply with the terms of the trust deed and adhere to applicable Australian tax law.” Trustees also have an obligation to act in the best interest of beneficiaries. To set up a trust, it can cost between $1000 to $3000 for a fairly basic trust. However, you can expect to pay that much again annually for ongoing annual accounting and tax compliance, though the amounts can vary significantly depending on how complex your trust is.
• Are they more trouble than they’re worth? Like many things in the finance world, if you don’t really need a trust, establishing one can lead to unnecessary headaches and money down the drain. If you have modest assets, no business risk, and simple tax affairs, a trust often just adds cost and administrative burden, Williamson says. “Consider a trust once you run a business with liability risk, own multiple investment assets, or have significant taxable income – basically when the likely benefits outweigh the ongoing costs and admin,” she says.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.