Identifying trust types

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation is below:

The first step in the process is to identify what sort of trust we’re dealing with.

Discretionary trusts and unit trusts are usually relatively easy to identify. The discretionary trusts will have a range of beneficiaries, but no single beneficiary will have any fixed entitlement to income or capital from that trust.

Therefore, the rights that a beneficiary has against the trustee are limited to the right to be considered for distributions from time to time and the right to ensure that the trustee fulfills their fiduciary obligations.

If you contrast that with a unit trust, the unit trust will usually have beneficiaries with units or fixed percentages, which entitle them to determinable amounts of the trust income and capital.

Therefore, a unit trust will be treated quite differently from a bankruptcy perspective and a Family Law Act perspective in the event something goes wrong for one of the unit owners.

The hybrid trust is quite different again and there is no single agreed definition.

You could talk to 10 different lawyers and probably get 10 different definitions of what a hybrid trust is.

It is a structure that has been evolving a lot over the last 10 to 15 years and there are a lot of different variations around, which each have slightly different provisions or quirks in the way they operate.

In a general sense, a hybrid trust is a trust which has some discretionary entitlements and some fixed entitlements.

One example of a type of hybrid trust that was particularly common in the lead up to the GFC is a negative gearing hybrid trust, where we have an individual unitholder who goes out and borrows funds to buy units in that trust, and that unit gives the unitholder a fixed entitlement to the income from the trust.

The thinking behind these hybrid trusts is that because the individual had borrowed to acquire an income producing asset, being the units, they could therefore claim a tax deduction for their interest on the borrowings.

However the trust deed would then have a separate provision which said any capital gain that may be realised by the trust could be distributed at the trustee’s discretion to a wide range of beneficiaries.

In other words, we have some discretionary entitlements in relation to capital and some fixed entitlements in relation to income.

Trust (Waltz) #2 – Trust Naming Conventions – Part II **

As mentioned in the last post, there are a myriad of approaches for creating any form of trust.

The first five profiled in this series are summarised below:

2nd Generation Family Trust (or a 'GST' – generation skipping trust) – this is an estate planning technique whereby assets are placed in trust for the benefit of grandchildren and later generations, rather than passing to the benefit of living children . From an asset protection viewpoint, the net unallocated assets in this type of trust should be outside the scope of a challenge to a deceased estate in states and territories other than NSW.

Lineal descendant, bloodline or capital reserved Trust – the deed establishing this type of trust typically limits the capital of the trust for the ultimate benefit of the specified beneficiaries (such as lineal descendants) but allows income distributions to a wider class of discretionary beneficiaries (such as spouses).

Estate Proceeds Trust – this is a trust established following the death of a parent of a minor child structured to qualify for excepted trust income tax concessions. Where there are two or more children to benefit from the estate proceeds income tax concessions, either a separate trust deed can be established for each child or a single deed is established benefitting all children.

Child Maintenance Trust – this is a trust established as part of a family law settlement which qualifies for the excepted trust income concessions. The main purpose is to fund all or part of the child support obligations associated with the upbringing of children. These obligations would otherwise be met personally in after tax dollars by the obligated parent.

Discretionary Trust – this is the most common trust, often referred to as a family trust. The trustee has a wide discretion to determine which of the beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Waltz #2’ is a song by Elliot Smith from 1998

Don’t you trust me baby? – Trust Naming Conventions – Part I **

At least in theory, the concept of a trust is relatively simple and involves one party (the trustee) holding assets for the benefit of others (the beneficiaries).

Trusts in one form or another have existed for hundreds of years in the English legal system and the basic components of a trust have essentially remained unchanged throughout that period.

A succinct overview of a trust relationship is set out here. 

Given there are only a few core elements which must be satisfied to have a valid trust relationship, overtime advisers and clients alike have largely only been limited by their imagination in terms of the way in which they craft any particular trust deed.

In future posts, brief summaries will be given about a number of the various approaches to creating trusts.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Don’t you love me baby?’ is a song by the Human League from 1981

‘Where’s the proof man?’ Powers of Attorney and Conflicts of Law **

Continuing the theme over recent weeks of conflicts of law between various jurisdictions, the way in which the powers of attorney provisions operate in each Australian state are very relevant.

Effectively, while each state has its own legislation (and completely unique forms) for powers of attorney, there is also legislation that is designed to ensure that each state will acknowledge each other state’s documentation.

While this theoretical position is comforting, practically the situation is anything but satisfactory.

For example, the enduring power of attorney document in New South Wales is less than five pages. The equivalent document in Queensland runs to around 20 pages.

For third parties (including banks), who are used to (in New South Wales) seeing a very short document, they will often be quite unsettled to be presented with the much longer Queensland version.

In a practical sense, we quite often therefore arrange for enduring powers of attorney to be prepared in each state where the client has substantive investments, particularly if they own real property in more than one jurisdiction.

A more detailed explanation of how to craft multiple, complementary, powers if attorney is explored in a previous post.

** For the trainspotters, ‘Where’s the proof man?’ is a line from Lou Reed’s song from 1989, ‘Dirty Boulevard’