40 Forms of Trusts

Matthew Burgess Director, View Legal

Forms of Trust • Fixed • Unit • Discretionary (family) • Hybrid • Resulting, constructive etc. • Bare • Lineal descendant • Section 102 trusts

1

Trustee Pty Ltd

Beneficiaries

Framework Today • Written summary • Diagrammatic summary • Example and discussion • Your questions answered • … and a picture tells 1,000 words

2 Some Reminders • Related roles (e.g. Guardian, principal and appointor) • Role of settlor • Vesting • ‘Converting’ trusts • Loan accounts • The Checklist Manifesto

Legal Basics • 1 of 1 – A legal relationship where –  Legal owner of property –  Holds property – trust property  For the benefit of others – beneficiaries (beneficial ownership)  On certain terms/rules – trust deed

3 Naming • In concept – simple Conventions • Limited only by imagination • Lack of consistency in language can make complex • No trademarks pending in names we use • Structure, rather than name used, should be focus • Order is – no order

Second Generation • technique Family Trust (or a • Trust for the benefit of grandchildren and later generations ‘GST’) • Children of ‘founders’ are ‘skipped’ • Should be outside the scope of challenge to estate (other than NSW)

4 GST Trustee Co

• Beneficiaries: Grandchildren and lineal descendants of founders • Founders children excluded • Spouses generally excluded

LDT, Bloodline or • Capital of the trust for benefit of the specified beneficiaries Capital Reserved (such as lineal descendants) • Income distributions to wider class of beneficiaries (such as Trust spouses) • The detail can be key (ie fully v partially reserved) • Watch for overlay of roles such as guardian, principal and appointor • Check level of restriction imposed by deed – eg can there be back to back distributions

5 Trustee Co

LDT Trust

Capital Income

Lineal descendants Fully range of only beneficiaries potential beneficiaries

Estate Proceeds • Established following the death of a parent of a minor child Trust • Structured to qualify for excepted trust income tax concessions • If two or more children to benefit single v multiple trusts • Can be complex • Key issue – vesting date – 18 years v 80 years • Also – no tax or duty relief on transfer of assets

6 EPT Trustee Co

No tax or duty relief on transfer of assets in Trust

Capital Income

For kids on Can have wider vesting class of beneficiaries

Child Maintenance • Analogous to EPT Trust • Established as part of a family settlement • Qualify for the excepted trust income concessions • Used to pay child support obligations • Key issues – no tax roll over in; and assets must pass to kids on vesting

7 CMT Trustee Co No tax or duty relief on transfer of assets in Trust

Capital Income

For kids on Can have wider vesting class of beneficiaries

Discretionary Trust • Most ‘common’ type of trust • Often referred to as a family trust • Beware the ‘standard’ • Some egs – 39% restriction, early vesting, distribution approvals, notional and FTEs

8 Settlor

Discretionary Trust

Trustee Pty Ltd

Trust

Beneficiaries

Special Purpose • SPVs traditionally a discretionary trust Vehicle trust • Key aspect - SPV performs only one discrete activity • Property development project • Certain type of investment activity • Discrete part of a wider business

9 SPV’s

Trustee Co Trustee Co Trustee Co

Property Share Business Investment Investment Trust Trust Trust

Unit Trust • Fixed entitlement • Contrast ‘fixed trust’ for tax and land tax purposes • Often ideal for investment activities between unrelated third parties • Overlay unitholders agreements • Note CGT event E4

10 Family Family Family Unitholders Trust Trust Trust Unit Trust

1/3 1/3 1/3

Trustee Co

Fixed Trust • Colonial decision (2011) • A fixed trust is narrow • Key issue – do beneficiaries have ‘vested and indefeasible’ interest • Variations to achieve definition • Recurring issue – super funds owning unit trusts

11 Fixed Trust Family Family Family Fixed Interests Trust Trust Trust Overview 1/3 1/3 1/3

Trust

Trustee Co

Hybrid Trusted Trust • Blend of various forms of trusts into one • Most common (?) - unit trust + discretionary trust • Ultimate owners a fixed entitlement to capital • Discretionary entitlement to income • Generally not suitable for arm’s length parties

12 100% Capital Units Hybrid Trust Overview

Capital Income

Wide range of discretionary income beneficiaries

Corporate Trust • Particular area of confused language • Tax legislation rules – eg. public trading • Trusts as companies for tax purposes • Entity taxation • Trusts as part of a tax consolidated group

13 Tax Consolidated Group

Form of Corporate Trust Holding Company 100%

100%

Family Subsidiary Company Trust

Protective Trust • Analogous to other trusts – eg a GST • One example involves two stages • Stage 1: fixed income distribution to principal • Stage 1 remains in place until a ‘triggering event’ • Stage 2: On ‘triggering event’ - fixed income ends and trust becomes discretionary • ‘Trigger’ can be death, certain age, other defined events

14 100% Income Overview

‘Trigger Event’ ‘Fixed’ Trust Discretionary Trust

Perpetuity trust • No vesting date mandated • In Australia – only available under SA law for a family trust • Interplay with estate planning • Super funds another example • International jurisdictions

15 Perpetuity Trust Example

Personally Owned South Australian Assets Transferred on Death Inter Vivos Trust

Asset Protection • Generally a discretionary trust Trust • Expressly excludes ‘founder’ as a beneficiary • ‘Double entrenches’ exclusion of ‘founder’ • ‘Founder’ also excluded from trusteeship, principal or appointor • Query effectiveness for family law

16 Asset Protection Trustee Co Trust

Family Trust

• 'Founder' excluded from all roles • Exclusion of 'founder' also 'double entrenched'

Partnership of • Flexible structure Trusts • Significant tax planning benefits • Usually standard discretionary trusts • Same trustee + unique principal • $6m test calculated separately

17 Partnership of Trusts Common Corporate Trustee Co

Trust Trust #2 Trust #3 #1

• Separate principals of each trust • Partnership agreement key • Contrast small business CGT if a company used

Offshore Trust • Most western jurisdictions allow trusts • Specific steps often needed • Rules vary in each jurisdiction • Trust need to be met – regardless of tax goals

18 Example Offshore refers to Trust MoD 'Enforcer‘ Independent Trustee Company (often written (often the settlor) by settlor) Foreign Trust Settlor contributes assets 'Protector' has approval rights over certain trustee decisions (often the settlor, although undisclosed) Beneficiaries (often not nominated until a later date)

Testamentary Trust • Range of testamentary trusts limitless • Fundamentally legal structure of TTs similar to inter vivos trusts • Fundamentally legal structure of TTs similar to inter vivos trusts • One key issue – power to vary

19 ‘Will’ maker

TTs

Personally owned assets

TT (established under Will)

Post-Death • Iteration of an EPT ‘Testamentary’ Trust • Standard discretionary trust, with estate wealth contributed • Primarily used where beneficiary is under 18 • ATO rulings support that income will be excepted trust income • Best practice is relevant children are ultimately entitled to capital of the trust

20 ‘Will’ maker

Post-Death Gifted to Child < 18 ‘Testamentary’ Trust Personally owned assets

LPR of Child

Gifts Inheritance

‘Standard’ Family Trust

Superannuation • Established solely to receive superannuation proceeds on Proceeds Trust the death of a fund member • Can be established by a will or by deed after the death of member • Can be set up as a ‘sub trust’ under a will • Beneficiaries limited to tax dependants • Analogous to EPT if established post death

21 ‘Will’ maker Personal assets

‘Standard’ SPT TT

Standard range of beneficiaries

SPT

Beneficiaries limited to tax dependants

Superannuation • Australian superannuation entities founded on basic trust Fund principles • Key difference to most trusts = super funds have no vesting • Concessional tax regime • Highly regulated - and constantly changing

22 Members have certain SMSF entitlements

SMSF

SMSF Unit Trust • Despite changes over time, SMSFs can invest in a related unit trust • In some cases, unit trust can borrow money • Form of unit trust generally needs to satisfy the definition of a ‘fixed trust’ • Regular compliance issue – converting unit trusts owned by SMSFs to fixed

23 SMSF SMSF Unit Trust

Unitholder

SMSF Unit Trust

Life Insurance Trust • Owner of a life insurance policy avoids tax liability • Trust to specifically own life insurance policies • All the rights of the life insured are assigned to the trustee • Then on death, no tax should be payable on the proceeds of the life insurance policy

24 Individual creates inter vivos trust

Life Insurance Trust

All rights assigned to trust Life Owns life policy Insurance Trust

Grantor Retained • Irrevocable trust established in a written agreement Income Trust • Grantor transfers specific assets to the trust • Grantor retains the income from or the use of the assets for a stipulated period of time • Less used structure in modern times

25 Transfer of Grantor Income capital assets Trust

Income rights mandated to Tailored grantor Trust

Grantor Retained • Iteration of grantor income trust Annuity Trust • Again grantor gifts property to a trust • Grantor retains right to a fixed annual payment for a certain period of time • Again, not widely used in modern times

26 Transfer of Grantor Annuity capital assets Trust

Fixed Income mandated to grantor Tailored (i.e. ‘Annuity’) Trust

Negative Gearing • Specific iteration of hybrid trust Hybrid Trust • Incorporates traditional unit trust + discretionary trust • Allows negative gearing + asset protection • Despite Forrest case, Tax Office resistance

27 Borrowed $ Negative Gearing

Trust Bank 100% Units

Fixed entitlement to income Discretionary Capital

Wide range of discretionary beneficiaries

Managed • Essentially unit trusts Investment Trust • Passive investment activities on a wide scale (often listed) • Can receive a concessional tax rate • Highly regulated

28 Large Pool of Unitholders

Managed Investment Trust

Managed Investment Trust

Capital Protected • Designed to protect the capital of the trust fund Trust • Analogous to a GST • Capital distributions heavily regulated or prohibited • Income may also be mandated to be accumulated

29 Trustee Co

Capital Protected Trust Trust

Capital Income

Heavily regulated More flexible, although may require limited access certain levels of accumulation to capital

Converting Trust • Traditionally initially a standard discretionary trust • Trust ‘converts’ into some other form of trust on ‘triggering’ event • Conversion may be on death of primary beneficiaries • Trust then may be a hybrid trust with set percentages for children of primary beneficiaries • Issues can arise with CGT, duty, loan accounts and estate planning

30 Trustee Co

Initial Trust

Converting Trust 'Trigger Event‘ (eg. Death of primary beneficiaries)

Assets of trust divided equally into 3 separate trusts 1/3 1/3 1/3

Trust #3 Trust #1 Trust #2

Beneficiaries: Beneficiaries: Beneficiaries: Kid #1 and their family Kid #2 and their family Kid #3 and their family

Service Trust • Commonly used to supply equipment, staff, premises etc to a related business. • Traditionally used by professionals who had to act personally • Tax planning and asset protection strategy • Structure normally a unit trust owned by family trusts • Heavily regulated by Tax Office

31 Service Trust Family trusts of individual partners own units in service trust

Partnership of individual professionals

Service Trust Non-professional services run by service trust

Borrowing Trust • Established solely for the purpose of borrowing money • Particular form of SPV • Regularly used in businesses and larger family groups • Can simplify arrangements with external financiers

32 Trustee Co

Borrowing One facility Trust (SPV) for all group Borrowing Trust Bank borrowings

Funds on lent amongst group members

Trading Company

Investment Trust

Individual Family Members

Superannuation • SMSFs can borrow money pursuant to certain rules Instalment Trust • Strict requirements need to be met • Requirements focused on type of trust • Trust essentially a ‘holding’ structure for SMSF

33 SMSF

Super Instalment Trust

Sole ultimate owner of asset

Instalment Trust Holds asset pursuant to strict terms

Constructive Trust • Equitable remedy provided by law to ‘right a wrong’ • Essentially a trust imposed by a court • Trust benefits party wrongfully deprived of their rights • The party who has existing legal rights forced to forgo those rights • Structure prevents unjust enrichment or unfair interference • Contrast –

34 Forced to acknowledge 'true' beneficial owner

Original legal and Constructive Trust created over beneficial owner Trust asset, essentially of asset removing asset from original owner

Resulting Trust • Creation of an implied trust by operation of law • Occurs where property is transferred to someone who pays nothing for it • Law deems the property to be held for benefit of the initial transferor • Court driven concept • Relatively rare • Contrast – constructive trust

35 Asset registered in the name of another

Resulting Trust

Party finances purchase of an asset Legal owner forced to acknowledge 'true' beneficial owner

Resulting Trust

Bare Trust • Beneficiary has all rights to both income and capital • Beneficiary can at any time call for asset to be transferred to them personally • Usually have little (or no) documentation • Trustee obliged to follow all directions of the beneficiary

36 Trustee Company

Bare Trust Minimalist trust Bare provisions Trust

True Owner – has all rights, is simply not registered as legal owner

Absolutely Entitled • Beneficiary is entirely entitled to trust property Trust • Beneficiary therefore able to call for the asset to be transferred to them • Regularly arises where original trust ends on a beneficiary attaining a certain age • Has received some ‘bad’ media due to tax planning aspects

37 Sole owner of asset

Absolutely Entitled

Trust Trust

Trustee legal owner, however beneficiary absolutely entitled to asset

Vested Trust • When trust passes its perpetuity period it ends (‘vests’) • What happens next depends on a range of issues • Terms of the trust deed starting point • One key issue – if no decision default beneficiaries • One key risk – trustee not realising trust has vested

38 Trustee Co

Vested Trust Vested Trust

Specific and absolute entitlement to set interests in assets with beneficiaries

Special Disability • Created and regulated by government legislation Trust • Designed to allow family to provide for a member with a disability • Trust can access concessional tax treatment • Family home owned via trust can access CGT exemption • Provisions of deed key – must be approved by Department • Often best to use template model deed

39 Trustee Co

Special Special Disability Disability Trust Trust

Operates as a 'standard' trust Beneficiary must be person with disability

Special tax concessions for income and any main residence

Employee Benefit • Traditionally set up by business owners Trust • Structure an attractive way to provide discretionary bonus entitlements to staff • Historically popular • Tax Office compliance focus reduced popularity • Many EBTs had their main investment as a loan back to contributing employer

40 Employees

EBT Trading Company

Distributions made to employees Contributions made by employer to SPV Trust

Employee Benefit Trust Trust invests contributions

Business • Business succession analogous to estate planning Succession Trust • Important to regulate exit of an ultimate owner on death, trauma and total and permanent disablement • Insurance can be used to assist transferring equity on owner’s forced exit • One insurance ownership approach is via a trust • Trust owns ‘master’ policy for all owners from time to time • Trusts makes payout while also ensuring equity interest transferred

41 Independent Trustee Co

Business Sole asset-master Business Succession insurance policy for all Succession Trust Trust business owners

Payment made on 'triggering' event of any owner by trust on receipt of insurance proceeds

Blind (or secret) • Trustee only party disclosed as involved in the trust Trust • Standard phrase ‘as trustee for [name of trust]’ undisclosed • Contrast ‘semi-blind’ trust - existence of the arrangement disclosed, but not the beneficiaries • Completely blind trusts - no documentation supporting existence of trust (everything verbal)

42 Trustee Co Semi-Blind Trust

Semi-Blind Trust

Range of beneficiaries nameless (normally listed in a separate confidential document)

Sub Trust • Distributions to beneficiaries may remain unpaid • Some trusts deem these amounts to create a ‘sub trust’ • The sub trust beneficiary can force payment at any time • Also possible for to create a ‘split’ sub trust over certain assets • Positive Tax Office rulings support tax free use of trust splits

43 Sub Trust via Trustee #1 ‘Splitting’

Main Trust Trustee #2

Different trustee but Sub Trust same beneficiaries

Checklist Manifesto • Identify objectives – Some Examples • Read the deed • Identify assets of trust • Confirm intended beneficiaries are eligible • Confirm intended tax and duty outcomes • Consider impact on related areas (eg estate plan) • Follow all procedural requirements

44 Amending Trust • CGT resettlement issues Deeds  income and capital entitlements  default beneficiaries  vesting date • Creation of a new trust • Tax Office view – including the Statement of Principles • Stamp duty and

Tax Office • ‘Resettlement’ TD2012/21 • Commercial Nominees • Statement of principles • Examples • Stamp duty position

45 Matthew Burgess Director Mobile: 0403 209 977 Email: [email protected] Website: http://www.viewlegal.com.au/ Blog: http://www.blog.viewlegal.com.au/ Twitter: https://twitter.com/matthewwburgess Linked in: http://au.linkedin.com/pub/matthew-burgess/1a/170/675 Instagram: @matthewwburgess

The material contained in this presentation is based either on information derived from our proprietary business diagnostics (including research) or from other sources within the market, which we believe to be reliable and accurate. It is general in nature and does not constitute specific advice. Business Health makes no representation or warranty as to the validity, relevance or accuracy of this information as it pertains to any specific practice or business.

Proprietary & Confidential

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