FAQs on Trusts
What is a trust?
A trust is a legal relationship between two parties, where one party (i.e. the trustee) holds the legal title to assets for the benefit of the other party (i.e. the beneficiary).
Should I hold my family assets and investments under a trust?
A trust is not a separate legal entity and cannot sue or be sued, although the trustees or beneficiaries may on its behalf. The advantages of a trust are:
If the trust is a discretionary trust (sometimes referred to as a family trust), it can also offer tax efficiency through optimising income and capital distribution to the beneficiaries.
Should I structure my business as a trust?
While a trust can protect the business’ assets for the benefit of the beneficiaries, it can also limit the business’ expansion as:
- the business cannot retain its profits without being taxed at the highest marginal tax rates; and
- the business cannot distribute its losses to the beneficiaries. Thus, the beneficiaries cannot utilise those losses to offset against their other income.
Who manages and administers a trust?
The trustee holds the legal title to the trust’s assets and manages and administers the trust, including distributing trust proceeds according to the trust deed to the beneficiaries. The trustee can sue and be sued on matters connected to the trust.
Who can be a trustee?
The trustee can be an individual who is 18 years of age and above and not under a legal disability. The trustee can also be a corporation (i.e. a corporate trustee). The trust is then effectively managed and administered by the director(s) of the corporate trustee.
Should a trustee be an individual or a corporation?
The trustee is personally liable for the trust’s liabilities. It is not unusual for trusts to have corporate trustees, to limit the trustees’ liabilities to the assets of the corporations. Corporate trustees are usually shell corporations with no or nominal assets.
Other advantages of a corporate trustee are:
- the corporate trustee can exist indefinitely unlike an individual trustee who will eventually die; and
- legal ownership of the trust’s assets does not have to be changed when there is a change in the director(s) or shareholder(s) of the corporate trustee whereas legal ownership of the trust’s assets has to be changed when there is a change in an individual trustee.
Can I control a trust without being a trustee?
If the trust has a corporate trustee, the shareholder(s) of the corporate trustee can effectively control the trust by exercising the power to appoint or remove the director(s) of the corporate trustee.
The trust deed can also provide for you to be an appointer, to appoint or remove the trustee of the trust. In this way, you can have ultimate effective control of the trust.
Can I be the settlor (i.e. the creator) and a trustee of a trust?
Yes, but it is not advisable as it may raise questions whether the settled sum was properly gifted to the trust and hence, the trust may be found not to be validly created.
Can I be the settlor and an appointer of a trust?
Yes.
Can I be the settlor and a beneficiary of a trust?
Yes, but there are tax implications. Tax advice should be taken.
Can I be a trustee and a beneficiary of a trust?
Yes, provided the trust has more than one trustee and more than one beneficiary. If you are the sole trustee and the sole beneficiary, you hold both legal and beneficial interests. As these interests merge together, no trust relationship can arise.
If the trust has a corporate trustee, you can be the sole shareholder and the sole director of the corporate trustee, and be the sole beneficiary of the trust.
Can I be an appointer and a beneficiary of a trust?
Yes.
Can another trust be a beneficiary of a trust?
Yes, provided the beneficiary is the trustee of that other trust and is acting in its capacity as trustee of that other trust.
Can a trustee be based overseas?
Yes, but there are tax implications. Tax advice should be taken.
What happens if a trust’s debts exceed its assets?
If the trust’s debts exceed its assets (i.e. the trust is insolvent), its assets will be used to pay off its debts in priority according to the law and the beneficiaries will receive nothing.
The trustee’s rights usually take priority over other creditors. The trustee also has a right of indemnity from the trust’s assets which is protected by an equitable lien over those assets.
What is the lifespan of a trust?
A trust has a lifespan of 80 years.
Is stamp duty payable on the creation of a trust?
Yes.
The above content is general in nature and is not intended to address your specific circumstances. We welcome the opportunity to have a chat with you and assist you with your legal issues or concerns. Talk with us and see the difference.
Updated June 2019.