A business can be operated through one or more trusts. Trusts have their own legal status and offer significant advantages over other structures.

A trust needs to be established by a deed of trust, which must have a trustee and beneficiaries.

While individuals can be trustees, we recommend using a company as trustee to avoid problems which can arise when an individual trustee dies, is incapacitated or is made bankrupt. The certainty of a corporate trustee is particularly important when the trustee conducts a business.

There are four main types of trusts:

  • discretionary trusts
  • fixed or unit trusts
  • hybrid trusts
  • superannuation trusts

A discretionary trust is one where there are a number of named or possible beneficiaries (sometimes described as a ‘class’ of beneficiares) but the trust deed gives the trustee the power to decide which particular beneficiaries receive the income or assets of the trust.

A fixed trust, on the other hand, gives each beneficiary a specific share in the income and assets of the trust. The most common fixed trust is a unit trust in which each ‘unit holder’ receives a specific number of units – much like shareholders in a company.

Discretionary trusts are often used for families and small businesses while unit trusts tend to be used when there are a larger number of owners in the business.

A more complex business might operate as a unit trust, with each unit holder in turn being a discretionary trust which owns the units on behalf of the family of one of the business principals. This can be a very effective structure for business partners who are not related to each other.

Hybrid trusts have a combination of features taken from discretionary and fixed trusts. For example, they can include a fixed entitlement to capital but a discretionary entitlement to income.

Superannuation trusts operate superannuation funds. ‘Self managed’ superannuation funds (sometimes called SMSFs) are often used by professionals and business people who want to take control of the investment and management of their superannuation.

For expert help with trusts and to make the right decisions in this sometimes complex area, contact Teece Hodson & Ward team members:

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