The power of trust: should you consider creating a trust fund for your finances?

The trustee can be a close friend or family member, but you can also elect to choose a professional trustee such as a lawyer or an accountant, which is a better choice if your trust will have complex terms or a large number of assets that need to be allocated and managed.

Trust funds are popular for a number of reasons. Families looking to secure the future finances of their children and build generational wealth might set one up, while business owners might choose to create one that can hold profits from their business activities, which they can then elect to distribute as income to any beneficiaries, or any succession planning elements of their overall retirement plan.

Regardless of the reason behind a trust fund, a key benefit of having one is that your trust won’t have tax to pay. Rather, the trust’s beneficiaries will be liable for tax incurred against any income in their name that comes from the trust.

While not referred to as a trust fund, a superannuation fund is a special type of trust fund, because the people managing your superannuation are acting as trustees who have been charged with looking after your savings ­– making you the beneficiary.

Another misconception of a trust fund is that it’s something only extremely wealthy people require. In reality, if you have even a small number of assets, whether it’s property, investments or lump sums of cash, setting up a trust can be a highly effective method of managing those assets in a way that benefits you and also any future generations in your family.

Aside from providing for future family members, other benefits of a trust fund include protecting assets from creditors, which can be highly beneficial if you own or operate a business, and for tax purposes, as the income generated from assets included in a trust fund will incur tax at relevant tax rates when it is distributed to the beneficiaries.

But as with any financial plan, there are certain risks to be aware of when considering a trust fund. These include:

Tax issues

If your trust fund is set up improperly, you might find you’ve inadvertently avoided paying the necessary taxes, which can result in fairly serious consequences if uncovered.

Loss of ownership

In setting up a trust, you pass over asset ownership, meaning you are no longer the owner of any of your assets you write into the trust. Instead, the trustee takes ownership of all assets, as they are the legal owner, whose name will appear on all documentation.

Time spent on administration

If you elect to set up your own trust fund, and even if you work with a professional, there are still a number of tasks, fees and requirements that can take up your time both during the establishment of the trust and throughout the term of the trust, through maintenance and management. So it’s not just something you can pop your assets into and ignore; your trust fund will require continued attention.

When setting up a trust fund, you can expect to undertake the following steps:

1. Understand why you want a trust: Clearly define why you want the trust and what you hope to achieve. Decide which type of trust suits your needs best, like discretionary, unit, hybrid, or others.

2. Choose a trustee: Pick someone, whether it’s a close friend, family member or financial professional, to manage the trust and act in the best interests of the beneficiaries. Consider the complexity of the trust and your preferences when selecting the trustee; don’t assign the responsibilities to a family member who might not have time to manage it properly.

3. Draft up a trust deed: Make a legal document that explains the terms and rules of the trust. It should cover things like what the trustee can do, what the beneficiaries are entitled to, how money or assets will be distributed and any special rules or limits.

4. Choose your beneficiaries: Decide who will benefit from the trust and clearly state their rights. Also, think about any changes or unexpected situations that could happen in the future and how you’ll manage those changes.

5. Understand the legal requirements: Make sure you meet all the legal requirements, like tax laws, trust laws and rules for reporting. This is where professional support can really come in handy.

6. Transfer your assets: Transfer funds or property into the trust, following the rules in the deed. This could involve cash, investments, property, or items you’ve outlined in the deed.

7. Don’t just ‘set and forget’: Regularly check how the trust is working to make sure it follows the law and adapts to any changes by keeping accurate records, preparing financial statements and meeting tax reporting requirements.