The trustee(s) (there may be more than one) of a trust may be a person or a company (the latter is known as a corporate trustee). In either case, the trustee must be legally capable of holding trust property in their own right. The trustee holds the trust property for the benefit of the beneficiaries.
Where the trust is established by deed (which in the case of a deceased estate is the will), the trustee must deal with the trust property in line with the intentions of the settlor as set out in the trust deed. They must also act in accordance with the relevant state or territory law regulating trusts, and with any other applicable law, including tax law.
A trust beneficiary can be a person, a company or the trustee of another trust.
The trustee may also be a beneficiary, but not the sole beneficiary unless there is more than one trustee.
Beneficiaries may have an entitlement to trust income or capital that is set out in the trust deed or they may acquire an entitlement because the trustee exercises a discretion to pay them income or capital.
Generally, the beneficiaries are taxed on the net income of a trust based on their share of the trust’s income – regardless of when or whether the income is actually paid to them.
Hybrid discretionary trusts can be hybrid discretionary or hybrid unit trusts. The former are the more common and take the best features of both discretionary and unit trusts and mixes them together in the one entity to create a powerful and flexible tax planning solution.
They are typically used to gear into property where an individual will borrow to purchase the units in the trust (usually using the property purchases by the trust as security) and then, when the property is no longer geared, the trust can repurchase the units (often borrowing money to do so).
Care needs to be taken when establish such a structure as not all trust deeds are adequate to allow the individual to claim the tax deduction for the interest expense on the loan.
The trustees of a discretionary trust are able to distribute income and capital gains to beneficiaries in whatever way they desire (typically the most tax effective means).
The assets of the trust are also protected in the event of litigation against beneficiaries as there is no single individual that owns any assets so therefore creditors of an individual cannot access any assets held by a trust.
A ‘family trust election’ must also be made in some circumstances e.g. in order to distribute franking credits. In addition, franking credits cannot be distributed to beneficiaries unless the trust has net income.
A company can be a beneficiary of a trust ensuring that the tax rate is capped at 30%, however, unless this distribution is actually paid to the company there may be other tax consequences e.g. deemed dividends and Div 7A loan issues.
Beneficiaries who receive capital gains can claim the 50% capital gains discount where the asset has been held for more than 12 months.