A trust is a written agreement which outlines rules for property for the benefit of others. There are three requirements for an agreement to be a trust, these are known as the three certainties, and refer to certainty of:
Trusts are useful for a wide range of reasons and there are numerous different types of trusts, all of which are beneficial for different reasons.
The trustee is the person in charge of the trust. Their job is to maintain the trust and they have onerous duties to abide by the rules of the trust. There can be more than one trustee; however there must be at least one.
A beneficiary is the person or persons for whom the property is held in trust for, they are the people who will receive a benefit from the property held in trust. There can be numerous beneficiaries; however there must be a minimum of one to fulfil the third certainty.
The trustor or settlor is the creator of the trust. They can be an individual, a group of individuals or a company. They gift the property to the trustees on trust for the beneficiaries.
The Trust property includes any assets placed in trust. Trust property can consist of a wide range of things, such as; cash, securities, real estate or life insurance policies.
Three common types of trusts include:
A Unit Trust involves portioning the benefit by dividing the trust property into ‘units’. These are akin to shares of the trust property, thus the number of units each beneficiary holds will determine their share of entitlement to trust income, capital gains and voting power. A unit trust is not as flexible as a discretionary trust, thus, they do not provide the same level of asset protection. For example, if a beneficiary goes bankrupt, the liquidator is able to sell their ‘units’ of the trust in order to raise capital to pay creditors.
A Discretionary Trust is also known as a ‘Family Trust’ as they are commonly used by families to ensure asset protection. For the most part they are immune from creditors or legal action and allow assets to be passed through generations without facing tax or duty. They are beneficial from a tax perspective as they enable the trustee to distribute assets between beneficiaries according to their relative tax brackets, consequently ensuring significant reductions to taxes. However, under a Discretionary Trust beneficiaries have no strict entitlement to receive income or capital. Thus they have limited rights, which include the ability to assert the trustee exercised his or her discretion appropriately.
A Hybrid Trust is a combination of a Unit Trust and a Discretionary Trust. This means that beneficiaries have some fixed entitlements, while other benefits under the trust are discretionary on behalf of the trustee. This combination generates a flexible tax solution, however they must be used carefully as the tax office and courts have long iterated their concerns over this type of trust. Because of their flexible nature, each hybrid trust will have very different rules and there are common disputes about the classification of these trusts due to their disparity.
Trusts are commonly disputed and when litigated they can give rise to complex legal arguments. Common disputes concerning trusts will arise between:
Disputes can arise for a number of reasons; some common disputes concerning trusts are described below.
The creation of a trust is complex and disputes commonly arise about their proper creation. In such disputes, the court may find that no trust was created, which can have serious consequences for beneficiaries, trustees and third parties alike. On occasion, the court may find that a different type of trust was created than envisioned, which can have serious implications on beneficiary rights, trustee obligations and taxation requirements.
Alternatively, a trust may arise even where one was not intended. These include: resulting trusts, which arise out of implied intentions interpreted by the court, and constructive trusts, which are an equitable remedy imposed by a court to compensate a party who has been wrongfully deprived of their rights.
Common disputes concerning management involve questions as to the appointment, removal or remuneration of trustees. These are often brought by beneficiaries against trustees, or between trustees and can involve a dispute as to a breach of trust. There are serious consequences for trustees who do not abide by their obligations under the trust; consequently this is a heavily litigated area.
Another common dispute between beneficiaries and trustees concerns their entitlement to benefits under the trust. In a unit trust these rights are concrete and a beneficiary has a strong assertion to their entitlements under the trust. On the other hand beneficiaries in a discretionary trust are only able to assert that the trustee did not exercise his or her discretion correctly. These disputes can commonly involve issues of trust classification in order to determine the assertion of rights by beneficiaries.
Due to the rigid and complicated taxation requirements surrounding trusts,issues commonly arise in this area. Third parties, such as the Australian Taxation Office are commonly involved or bring about these disputes, which can arise for a number of reasons and often involve a dispute as to the proper creation and classification of the trust.
Trusts are a complicated area of law which if not constructed correctly in the first instance may have significant ramifications for a wide range of parties in the future. Similarly, the continued maintenance of them is complicated and involves careful adherence and management on behalf of the trustee.
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