WHAT IS A TRUST?
Once a decision is made to buy an asset or start up a business, the next common question is, will I acquire this asset in my individual name, or in a company or a trust?
Individual ownership is easy to understand. A company is also relatively well understood as a type of ownership that protects shareholders from personal bankruptcy if the company goes bust.
But what is a trust and why consider having one? For starters, a trust is not a legal entity of ownership at all. Only people and companies can own and trade in assets. A trust is an arrangement by which a person or a company holds the legal ownership of an asset but can only use that asset for the benefit of another. A trust therefore is not a form ownership but more like a job.
For the trust to be legal, the “arrangements” of ownership are, usually, clearly written down in a special type of document called a trust deed. This document is effectively a job description which tells the official legal owner (now called “the trustee”) for whose benefit the particular asset(s) must be held/used and the full spread of rights and responsibilities which the trustee must follow in the performance of that role. An interesting feature of a trust is that the so called job can be made to last as long as 80 years. A trust arrangement therefore can actually outlive its creators and extend into generations of people who may not have even been born when the trust is first set up.
As for the circumstances in which a trust might be preferred over the other two ownership options, the decision almost always comes down to a cost -v- benefit analysis. On the benefit/positive side, trusts can offer a level of protection from personal bankruptcy, which is arguably superior to companies. Trusts can also create opportunities to legally reduce the taxes that would normally attach to or flow from direct individual or corporate ownership.
On the cost/negative side, setting up and thereafter maintaining a trust structure attracts legal and accounting fees and (ironically) in some circumstances, taxes that would not normally be payable if there was no trust in the first place.
Trusts certainly have their uses and are very much a legitimate third choice when it comes to deciding how your assets are to be owned and operated. That decision however should always be made in close consultation with a suitably qualified accountant and lawyer.
The information in this article is merely a guide and is not a full explanation of the law. This firm cannot take responsibility for any action readers take based on this information. When making decisions that could affect your legal rights, please contact us for professional advice.