Probably the most popular business structure used by farmers are family trusts. In this article, we’ll discuss why they’re used, as well as their advantages and disadvantages.
Trusts are interesting entities because nobody actually owns the assets of the trust. They are held in trust and administered by the trustees of the trust who have been appointed by the trust ‘appointor’.
How a Trust works
The trust is regulated by a trust deed which is a legally binding document that defines the rules and operation standards of the trust. While the trustees manage the operations of the trust, the real power is with the appointor, who can hire and fire the trustees. The appointer’s role is often overlooked and misunderstood because it isn’t usually exercised. The time when this will be important is on the death of a trustee (or the appointor).
Who are the trustees?
The trustees can be individuals or a company. In the latter, the directors of the company act as the trustees. This is a very important consideration when setting up a trust. From our experience, it’s more effective and efficient to use a corporate trustee because companies are perpetual (can go on forever). This means the directors can change without affecting the company. The assets of the trust are legally held in the name of the trustees and, with a company structure, this wouldn’t need to change even though the directors may resign or die. The trustee’s role is to act in the best interests of the beneficiaries and abide by the rules of the trust deed.
Why use a Trust ?
The main reasons why trusts are used includes:
- Perceived asset protection in the event of divorce.
- Protection from creditors.
- Effective way to own land which can be ‘passed down’ to the next generation without the need to change the structure.
- Discretion in the way trust capital and income is distributed to beneficiaries.
- Trust income must be distributed to beneficiaries, which can be an effective way to manage tax because amongst different people.
- Lenders will normally lend to trusts.
Disadvantages of Trusts
Trusts can have disadvantages, which include:
- Trustees can also be beneficiaries and perhaps use their role to their advantage.
- Trust assets don’t form part of a person’s estate (this is often not understood).
- Trusts are included in Centrelink assessment for benefit payments.
- The death of a trustee or appointor could have a significant effect on the beneficiaries. This makes it vitally important that the appointor and trustees have current Wills and Powers of Attorney agreements in place.
- Trust distributions are often only accounting entries and the beneficiaries have the right to demand the payment of distributions, even after many years.
- It’s not uncommon to see large ‘loan accounts’ in trust financials. These are monies owed by the trust to beneficiaries. On death, these loans form part of the person’s estate and must be paid out. This could be a major problem unless the beneficiary has agreed to forgive the debt.