A trust is a legal structure used to run a business. While trusts may seem complicated at first, a trust can save a business money by providing significant tax benefits.
A trust imposes a legal obligation on a trustee. A trustee is a person administering the trust, to carry out the business. A trust can have beneficiaries, which are people that have invested in the business and who also receive benefits from distributions of profit.
A trustee may be an individual or a company. I like to imagine a truck and trailer, where the truck is the trustee and the trailer is the trust. The truck operates the business and its assets as it tows along the trailer. It is important to note that the trustee can be liable for the debts of a trust. This means that if the trust goes into insolvency or debt, the trustee’s assets may be used to cover the costs.
There are two main types of trusts – a discretionary or unit trust.
In a discretionary trust, the trustee can choose how much income or capital is given to beneficiaries. For example, if there are two beneficiaries to a trust, the trustee can decide not to distribute the income evenly (50%) to each person. The trustee can pay one beneficiary 80% and the other 20%. These percentages are not fixed and are up to the trustee at the end of the day. Family businesses often use discretionary trusts because the beneficiaries are usually the family members and are comfortable for the trustee to choose their distribution percentage.
In a unit trust, the trust benefits are divided into ‘units’. Units are fixed, quantifiable amounts and beneficiaries invest in these units. The benefits given to beneficiaries depends on how many units in the trust they own. For instance, if two beneficiaries (known as unitholders) both own 50 units each, then both will receive 50% of the distribution. These trusts are used when independent people run a business together. Unit trusts give them financial security as they know what distribution of profit (if any) they will all receive.
To help you better understand whether your business needs a trust, below is a table of advantages and disadvantages:
- Flexibility of distributions in the case of a discretionary trust
- Financial security in the case of unit trusts
- The trust provides more financial privacy than a company
- Establishing a trust is typically more expensive to establish and maintain than a company
- Trusts are difficult to dissolve and make changes to
- A trust MUST distribute profit/income to beneficiaries, otherwise pay an undistributed income at a high tax rate
- Trustees can be personally liable for a trust’s debts
We can assist in providing you with structure advice to ensure that your business is tailored to your needs, and we can help you set up your trust. Just a heads up, setting up trusts usually includes a formal trust deed, but you will need you to undertake some yearly tasks, like seeing your accountant and making a distribution to the beneficiaries of the trust.