Trust Basics: What They Are and Why They Exist

Trusts are one of those things you’ve probably heard your accountant mumble “Might be worth putting that in a trust.”

You nod politely, but deep down you’re thinking, is this like trusting my mate Dave to pay me back for the Uber?

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Spoiler: it’s not.

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A trust is simply a legal structure where one person (the trustee) holds assets on behalf of other people (the beneficiaries).

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The cast of characters in a trust

Every trust has a few key players. Here’s who’s who:

• Trustee – The person (or company) who actually looks after the trust. They make the calls on business decisions, investments and who gets the income. Big responsibility, because legally it’s on them if things go wrong.

• Beneficiaries – The people who benefit from the trust. They’re the ones who get the income and assets, according to the rules of the trust. In a family trust, this is usually family members.

• Appointor – The behind-the-scenes boss. The appointor has the power to hire or fire the trustee. They’re the ultimate controller of the trust, even if they don’t make day-to-day decisions.

• Settlor – The person who sets up the trust in the first place by putting in a small amount of money (often just $10). After that, they step away – they can’t be a beneficiary, and they usually don’t have any further involvement.

Think of it like a play:

• The settlor writes the script,
• The trustee performs it,
• The appointor directs it,
• And the beneficiaries get to enjoy the show.

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Other key trust terms you’ll hear

When people talk trusts, a few extra terms get thrown around that can sound scarier than they are. Here are the big ones:

• Trust Deed – The rulebook of the trust. It sets out how the trust runs, who can benefit, what the trustee can and can’t do, and how decisions must be made.

• Corporate Trustee (Trustee Company) – Instead of a person being trustee, a company is chosen. If something goes wrong, only the company is responsible, not the people behind it. This helps keep personal things safe, like your house. Most of the time, a company is used as trustee.

• Distributions – Trusts don’t pay tax themselves. Any profit from the trust each year is handed out (distributed) to the beneficiaries and taxed to them. Even if no cash changes hands, the distribution still counts for tax purposes.

• Present Entitlement – A very ATO-sounding phrase that basically means a beneficiary has a legal right to the income of the trust (even if they haven’t received it yet).

• Corporate Beneficiary (Bucket Company) – Instead of distributing profits to individual beneficiaries, the trust can distribute them to a company. The company then pays tax at the company rate (generally 25%). This can be a smart way to reduce tax when family members are already on high personal incomes, since profits can be taxed at 25% rather than the top individual rate of 47%.‍

• Trust Distribution Resolution – Each year before 30 June, the trustee must write down who will get the trust’s profits. This written record is called a trust distribution resolution.

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The main types of trusts

1. Discretionary Trust (aka Family Trust)

What it is: The most common trust for families and small businesses. The trustee decides who in the family gets what slice of the pie each year.

When used: For running a business, holding investments, or sharing wealth within a family.

• Pros:
  
  • Flexible income distribution amongst family members (helpful for minimising tax legally).
  • Asset protection if things go wrong. If you’re sued personally, the assets held in the trust are generally protected because you don’t legally own them.
  • Can pass wealth through generations smoothly.
• Cons:
  
  • Profits must be distributed to beneficiaries every year, even if you don’t actually take the cash.
  • Losses stay locked in the trust until future profits are made, which can make negatively geared properties less attractive.

2. Unit Trust

What it is: Everyone owns a set number of “units” in the trust, like shares in a company. Income distributions are based on the number of units you own, not on the trustee’s mood.

When used: Often for business partners who want clear, fixed entitlements.

• Pros:
  
  • Simple, fair distribution.
  • Good for unrelated parties going into a deal together.
• Cons:
  
  • Less flexibility than a discretionary trust.
  • Can get messy if one unit holder wants out.

3. Hybrid Trust

What it is: A mix between a discretionary and unit trust. Some income is fixed, some is at the trustee’s discretion.

When used: Occasionally for complex family/business setups where people want both certainty and flexibility.

• Pros:
  
  • Tailored to unique situations.
  • Can offer the “best of both worlds.”
• Cons:
  
  • More complex and costly to set up.
  • ATO side-eyes them.

4. Testamentary Trust

What it is: A trust created under a will, coming into play when someone passes away.

When used: Estate planning, making sure assets are protected and kids/grandkids are looked after.

• Pros:
  
  • Tax effective for minor children (they can access adult tax rates on distributions).
  • Protects inheritances from divorces or creditors.
• Cons:
  
  • Only kicks in after death, so no help during your lifetime.
  • Requires clear legal drafting in the will.

5. Bloodline Trust

What it is: A type of discretionary trust that limits distributions to only direct descendants of the family (children, grandchildren, etc.), excluding spouses or in-laws.

When used: Protecting family wealth so it stays within the bloodline, especially in case of divorce or separation.

• Pros:
  
  • Strong protection against assets leaving the family through relationship breakdowns.
  • Keeps wealth tied to the family tree.
• Cons:
  
  • Less flexibility with distributions.
  • More complex and costly to set up.

The bottom line

Trusts can be brilliant tools for protecting assets, managing tax, and planning for the future. But they’re not one-size-fits-all, and they definitely aren’t “set and forget.”

Each type has its place, and the right one depends on your family, your business, and sometimes even your love of admin.

If you want more information on trusts reach out to them team who’ll be happy to help answer any questions.

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– The team at PAL (making accounting slightly less boring since way back when)

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Disclaimer: This article is here to give you general info only, not professional advice specific to your unique situation. While efforts are made to ensure accuracy, the content may change over time. We can’t take responsibility for any decisions based on the contents of this article, so be sure to chat with your accountant or advisor first!

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