Trust Deed

A trust is established to provide benefits to specific parties known as beneficiaries. These beneficiaries can be diverse, ranging from individuals to companies and even other trusts, depending on the trust’s structure. 

Types of Beneficiaries 

• Primary Beneficiaries: These are explicitly listed in the trust deed. They are the main focus of the trust’s provisions and receive benefits directly as stipulated by the trust deed. Primary beneficiaries are often easily identifiable individuals or entities that have been specifically named because of their importance to the settlor. 

• General Beneficiaries: Unlike primary beneficiaries, general beneficiaries are usually categorised as a group or class. This category often includes relatives or associates of the primary beneficiary, such as spouses or family members. The trust deed does not list these beneficiaries by name but instead describes them through their relationship to the primary beneficiary. 

Flexibility in Discretionary Trusts 

Discretionary trusts are commonly used for their flexibility in managing and distributing the trust’s assets. In these trusts, the trustee has the authority to decide, within the guidelines set by the trust deed, how and to whom the income and sometimes the capital of the trust will be distributed each year. This flexibility allows trustees to make decisions that could optimise tax benefits for the trust by distributing income in a way that minimises tax liabilities for beneficiaries. 

This structure ensures that the trust can adapt to the changing needs and circumstances of its beneficiaries, making it a dynamic tool for managing and protecting assets in a way that best serves the interests of those it is intended to benefit. 

The settlor initiates a trust by transferring an initial property or asset into it, an action referred to as the settlement. Typically, this initial contribution is made for a nominal amount. Once the settlement is complete, the settlor generally has no further involvement in the trust’s operations. 

It is advisable for the settlor to be an external third party who does not have any other role in the trust, such as a trustee or beneficiary, to avoid potential conflicts of interest and tax implications. Often, professionals like accountants or lawyers are chosen to act as settlors due to their expertise and impartiality. 

A trust is not designed to last forever. In many regions, including most states and territories in Australia, the law limits the duration of a trust to a maximum of 80 years. However, the specific term of a trust can be shorter, depending on the stipulations in the trust deed.  

Trusts can also be structured to commence or conclude based on specific events, which should be clearly detailed in the trust deed to ensure clarity and legal compliance over the duration of the trust. 

A trustee is an individual or a corporate entity appointed to manage and oversee the property of a trust on behalf of its beneficiaries. A corporate trustee, often referred to as a trustee company, operates under the same principles but brings the benefits of a corporate structure, such as continuity and limited liability. Trusts can appoint multiple trustees, and each trustee is required to sign and date the trust deed to validate their acceptance of the trustee responsibilities. 

The core duty of the trustee is to manage the trust’s assets strictly according to the purposes defined in the trust deed. This involves adhering to all relevant laws and regulations specific to the state or territory in which the trust operates. Trustees must be well versed in the trust deed to ensure that their actions, such as asset purchases or document executions, are authorised under the deed. 

Trustees are bound by a set of stringent ethical duties. These include the obligation to act honestly, reasonably, and with utmost good faith to protect the interests of the beneficiaries. The role demands a high level of integrity and diligence in managing the trust’s affairs, reflecting the significant trust placed in them by the trust’s stakeholders. 

Liability for Breaches 

If trustees fail to fulfil their duties, they can be held liable for breaches. This potential for liability underscores the importance of trustees fully understanding and strictly following both the letter and spirit of the trust deed and the relevant legal frameworks governing trust operations. 

The vesting date of a trust deed signifies the point at which the trust is scheduled to terminate. This date is important as it marks the end of the trust’s operation and the final distribution of its assets. Generally, there is flexibility to extend the vesting date if necessary, under two conditions: 

• Extension Before the Vesting Date: Any changes to prolong the lifespan of the trust must be made before the vesting date arrives. 

• Compliance with Maximum Duration: Even with an extension, the total duration of the trust must not exceed 80 years. 

Once the vesting date has passed, it is no longer possible to alter it. This limitation underscores the importance of careful planning and foresight in managing the trust’s timeline, ensuring that all necessary adjustments are made within the legal constraints and before the trust reaches its predetermined conclusion. 

Trusts are often used as tools for tax planning, offering flexibility in how taxes are handled in relation to the assets and their distribution. The trust deed specifies the types of transactions permissible within the trust, along with the distribution rules that can be designed to optimise tax advantages.  

For instance, the allocation of income or capital gains can be structured in a way that minimises the tax burden on the beneficiaries, in accordance with the trust’s objectives and legal tax planning strategies. 

Protecting assets from potential claims against the beneficiary is another crucial function of the trust. Through the trust deed, assets are placed under the control of the trustee, legally separating them from the personal property of the beneficiaries.  

This separation helps shield the trust’s assets from creditors, legal judgements, or other financial claims directed at the beneficiaries. The trust deed outlines these protective measures, ensuring that the assets remain secure and are used solely for the purposes intended by the trust. 

Trusts can also be established for business purposes, such as investing in real estate or managing a portfolio of stocks. The trust deed is integral in these scenarios as it defines the trustee’s authority to engage in business activities, invest in certain assets, or trade. It sets the guidelines under which business decisions must be made, aligning these activities with the trust’s overall objectives.  

This ensures that all business dealings are conducted within a legal framework, providing clarity and security for both the trustee and the beneficiaries.