When it’s a matter of Trust

Financial matters are typically very private affairs. It’s the reason why we secretly love to read about family financial feuds in the press. And while coverage on this can make for an entertaining read, that’s where its usefulness ends. In this edition of Keeping in touch, we thought we’d take a closer look at what a trust is.

A trust fund is a fund in which assets are managed by a trustee or board of trustees for the benefit of another party or parties. The trust deed is the document that defines the relationship between the trustee and the beneficiaries.

Trusts can be used for a variety of reasons. We will look at two common kinds of trusts – a discretionary family trust and a testamentary trust.

A discretionary family trust
This is a trust arrangement where the beneficiaries are generally family members. The trustee holds assets on behalf of the beneficiaries.

The trustee can decide which beneficiaries will receive a distribution of income and/or capital from the trust. This can change each year.

A discretionary family trust can be suitable for people who:

  • are seeking asset protection (for example, small business owners or professionals)
  • have family members who are not able to manage finances (for example, drug or gambling addictions)
  • have family members with intellectual disabilities
  • are concerned about the financial impacts of divorce for family members, or
  • have sufficient assets to make the strategy financially viable.

A testamentary trust
This kind of trust is established under a will. It does not come into effect until the death of the person making the will. The trustee holds assets on behalf of the beneficiaries.

Some benefits of a testamentary trust include:

  • distributions to children under age 18 are taxed at adult tax rates rather than the child penalty rates
  • assets are protected for minors who are not yet capable of making good financial decisions
  • assets may be protected for beneficiaries who become bankrupt or divorced
  • assets may be protected to beneficiaries who work in high risk professions
  • assistance can be provided to beneficiaries with special needs who may require another person to provide financial management (for example, spendthrift beneficiary or beneficiaries with a disability).

Most people don’t have the complexity of situation, or the assets required to make full use of a family trust. As a part of an estate planning strategy though, especially where minors are beneficiaries, a testamentary trust can be a very useful vehicle. To set up and manage a trust, your financial planner, solicitor and accountant will need to be involved. We recommend you seek advice in regard to your own situation.

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