As simple as trusts get
So you’ve got a family trust, someone set it up for you, but you’ve got not a lot of idea why or how it works? You’ve heard about trustee, appointor, settlor, primary and secondary beneficiaries but don’t really know what they all do? Yep, I hear your confusion. You can be forgiven for not being an expert, it’s a real concept.
Trusts are a great vehicle for both asset protection and tax flexibility/benefits. But you can read all about that everywhere, and that’s already been decided and set up for you. So let’s not do the boring spiel.
Instead here, I think if I can give you insight into all those roles mentioned beforehand, that will maybe give you basis to understand why and how these things work. It’s an exciting subject matter I know, so sit back and relax, and I’ll step this out for you.
Firstly, the trust itself is only a legal arrangement. The legal arrangement is the trust deed. Yes we do financial statements and tax returns for it but it isn’t anything that exists – unlike a person or a company. This leads into why there’s all this mumbo jumbo terminology.
It has to have a trustee. Yep, no other possible way around it, they always have one. The trustee is the actual person or company that operates the legal arrangement. At Dtax™ we always recommend a company as the trustee. The trustee has an important role, to run the trust, as it says it has to in the deed, for the benefit of the beneficiaries. It’s also the fallback guy IF it ever does anything outside that deed. Having a company there with only $10 of shares keeps you personally away from responsibility, and, if we need to change whose running the show, then we can simply change company directors, instead of a new deed.
Next beneficiaries. Normally Mr and Mrs will be primary beneficiaries. For a family trust, if you’re in anyway related to them by blood or marriage, then you make the cut for secondary beneficiaries. Who says so? The deed does. Beneficiaries are simply the POTENTIAL people that can get a distribution of profit from the trust. They never have specific right to it (at least not for family trusts – there are other types).
At this point I can tell you’re excited. Excited to know what in the world an appointor is. Well you should be. This is actually a major game player in this montage of roles and usually completely overlooked or unconsidered. The appointor has the power to completely trump the trustee and appoint a new trustee. Yep, you don’t want to get on the wrong side of this character. They are actually the most powerful person in this arrangement. Commonly the appointor/s will simply be the same as the primary beneficiaries. But you really should consider from an asset protection point of view if it should be someone else, or, it can actually be a company. Think who you’re dating may stiff you? Yep you could make your Mum the appointor. Check-mate.
But before this thing can get off the ground, there needs to be something in trust for the beneficiaries. The trust doesn’t exist until there’s something to be in trust. So this is where the settlor chucks (usually) a big $10 windfall in. This kicks it all off. Woo hoo, you’re rich! The settlor is someone who can’t ever benefit from the trust, so, this is usually your accountant or solicitor, unless that’s who you’re dating…
So there you have it. All these minions make up what has to happen to get this legal arrangement working, and now you know why they have to do what. But this is a simple wrap up of what is (like everything) a complicated thing, so if you need elaboration you should meet with your accountant and get them to jump on the etch-a-sketch and draw diagrams for you and explain further, specific to your own circumstances.