One of the most common questions I am asked, especially of doctors, is whether they need a Trust in their business structure and if so, what type of Trust?
Trusts are one of the most common structures set up by accountants for medical practitioners, because they have some great features and benefits to protect your personal assets, manage investments and/or for tax planning. Many doctors have established a Trust as the ultimate holding entity for their practice and either they act as the Trustee for that Trust, or a company does.
Surprisingly, there is still quite a lot of confusion about Trusts and some of the most commonly asked questions by practitioners revolve specifically around the type of Trust structures that exist.
There are several different types of Trust structures, depending on what your purpose or desired goal is.
Let’s first take a look at the two most common Trust structures.
1. Unit Trust:
A Unit Trust is a very specific type of Trust. In a Unit Trust the beneficial ownership of the Trust property is divided into units. Each owner holds a fixed number of ‘units’ that represent the value of their investment and return.
Therefore, it does not give the Trustee the discretion to distribute income or capital among unit holders, distributions must be allocated in accordance to units held in Trust.
2. Family Trust:
The other type of trust is commonly referred to as a Family Trust, though more accurately, and legally, described as a Discretionary Trust. A Discretionary Trust is the preferred vehicle for protecting personal assets in the event something goes very wrong. The Trust holds the assets, such as the family home, personal investments and superannuation, or even the shares in an operating entity. Because these assets are held by the Trust for the exclusive benefit of your family, (hence the name ‘Family Trust’), or whoever the beneficiaries might be, they do not form part of the pool of assets that might be available to creditors in litigation or bankruptcy.
The Role of a Trustee:
We find several of our contacts have set up a Trust without a proper understanding of there purpose of the Trust or the duties of acting as a Trustee.
Being a Trustee is what is known as a fiduciary role. A fiduciary is bound to a legal and ethical duty to act in the best interests of another person. If you are appointed Trustee, you have an enforceable legal obligation to ensure that the assets of the Trust are properly managed and disbursed only for the purpose permitted by the Trust Deed and in the best interests of the beneficiaries to the Trust.
A Trustee must act with due care, skill and diligence. To discharge this duty, you must familiarise yourself with the Trust Deed to ensure you know and understand both the purpose of the Trust and the functions of the Trustee. In a Discretionary Trust, for example, disbursements are at the discretion of the Trustee. It is imperative that you understand your obligations under the Deed before making a disbursement.
Trusts are indeed worthwhile structures. The right structure can ensure you can focus on your practice and patients without worrying about your financial exposure, but before you sign the Trust Deed, make sure you understand what it means for you and when in doubt, ASK.
If you are the Trustee of a Unit or Discretionary Trust I encourage you to review the Trust Deed so you understand your obligations.
It’s also worth getting a complete understanding of the benefits of a family trust or unit trust for your circumstances.
If you would like independent legal advice, the team at You Legal are always happy to help. You can contact us here.