The origins of the law of trusts is traceable several centuries ago. Trusts remain highly relevant for taxation and structuring purposes.

In Australia and many other countries trusts are used for both personal financial planning and asset protection, and in business for efficient management of assets, liabilities and income distribution. Recent proposed law changes to trust law in Australia have sought to introduce entity level taxation for trusts. The changes did not materialise. They would have been a significant disincentive for the creation of trusts.

Trust law is voluminous - literally, some texts stretching across 14 volumes.  This short article will examine the operation of trusts and some of the major advantages of conducting business using trust structures. 

1. What is a trust?

A trust is a relationship between parties, being the trustee and beneficiaries, regarding property. Property under trust can be either tangible (ie land and buildings) or intangible (ie intellectual property).

The trust is a device by which the ownership over property is divided into parts (eg, if there are 2 beneficiaries, then the ownership is divided into two, which may be held by two different persons). Herein lies the usefulness of trusts. The legal ownership is with the trustee and the beneficiaries of the trust have the beneficial ownership.

2. What do trustees do?

The main duty of the trustee is to protect the trust property for the benefit of the beneficiaries, including adopting proper investment or business strategies. The trust deed will spell out the duties and responsibilities of the trustee and provide for the remuneration payable to the trustee.

The powers given to the trustee become more important when the trust is a "discretionary trust", where the trustee has the power to determine how much of the income or capital of the trust to distribute to the beneficiaries. 

3. Who is an appointer?

An appointer is a person who has the power to appoint or dismiss the trustee. The appointer could even be the beneficiaries of the trust. This is important in the case of a trust used to operate a business, where the ultimate beneficiaries of the income from the business have the power to ensure that the business is operated properly for their benefit.

4. Business trusts

In business, unit trusts and discretionary trusts are the most common structures used, either as a stand alone operator of a business or in a combination of trusts depending on the number of stakeholders in the business and their personal financial and family planning objectives.

As above in business practice it is common to use a combination of trusts.  This depends on the personal circumstances of the individuals involved. Some of most popular structures are briefly described below:

	(a) Discretionary and unit trusts   In this arrangement discretionary trusts of individuals will hold the units in a unit trust which carries on the business. Income from the Unit trust is distributed to the discretionary trusts which in turn will distribute the income to its beneficiaries according to the discretion of the trustees of the discretionary trusts.
	(b) Partnership of trusts    This is a partnership of trustees of two or more trusts, mostly discretionary trusts. The business will be carried on by an agent or manager appointed by the partnership ie the trustees.

Other considerations for trusts

Before entering into a trust arrangement, it is essential that capital gains tax and stamp duty matters are taken into account.  In particular, the small business concession applicable to capital gains tax should be considered.

Additionally loss carry forward rules are complex when it comes to trusts intending to carry forward their losses and these should be thought through.

The primary decision to be taken is whether you need a trust at all to carry on the business you are currently carrying on or intend to carry on in the future. A company or partnership structure may prove to be adequate for your purposes, or it might even be appropriate that you enter into service trust arrangements with the business. Talk to your lawyer or accountant to ensure a trust is an appropriate structure for your business before going down the trust road.

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