Various types of trusts are commonly used in Australia as the preferred structure for managing investments, overseeing family finances and running businesses.
A key consideration when creating a trust is the appointment of a corporate trustee. The use of a corporate trustee can strengthen asset protection, limit personal liability and provide greater control over how distributions are made, making it an important part of the administration and overall structure of a trust.
Did you know that Australia offers many different types of trusts?
If you are planning to establish a trust, it is important to understand the different options available so that you can choose the type that best suits your personal or business circumstances.
In this guide, we have outlined seven of the most commonly used trusts in Australia to help you make informed decisions when establishing a trust for your investments, business or family financial planning.
What Is a Trust?
A trust is a legally recognized arrangement where the settlor transfers assets to a trustee, who manages these assets on behalf of the beneficiaries. The main purpose of a trust is to efficiently distribute and manage assets for tax purposes, protect them from creditors or legal claims, and provide for beneficiaries, including those with special needs.
Trusts also play an important role in managing tax liabilities, maintaining control over assets during a person’s lifetime, and ensuring the long-term continuity of a family business or legacy. By establishing a trust, individuals can protect their assets and ensure that they are used in accordance with their intentions.
Types Of Trusts in Australia
Understanding the different types of trusts in Australia can help you choose the structure that best suits your financial, family or business needs.
1. Discretionary Trust (Family Trust)
Discretionary trusts, commonly called family trusts, are popular because of their flexibility. The trustee decides how income and capital are distributed to beneficiaries. Families often use these trusts for tax planning and wealth management because they allow income to be allocated to members in lower tax brackets, providing significant tax benefits – if the trust is managed properly. Improper administration can lead to unexpected tax consequences. Once established, only family members can benefit; distributions to non-family members can result in significant tax penalties.
2. Deferred Trust
A Deferred Trust specifies in advance the beneficiaries’ rights to income and capital as set out in the trust deed. This structure is suitable for situations that require a clear and predetermined distribution of assets, such as joint business ventures or investments. A typical example is a will or estate where the trust ensures that assets are distributed according to predetermined instructions. A revocable trust provides certainty and clear ownership but offers less flexibility than a discretionary trust.
3. Testamentary Trust
A testamentary trust is established under a will and only becomes active after the person’s death. It provides control over how assets are managed and distributed, rather than passing assets directly to beneficiaries. Testamentary trusts are ideal for parents with young children, dependents with special needs, families looking to protect their inheritance from divorce or disputes, and high-value assets that require tax-efficient planning. They can be structured as discretionary, revocable, or hybrid trusts and may include age limits or conditions on access. Proper planning and drafting are important, as poorly set-up trusts can be challenged under the Family Provisions Act 1972 (WA). Trustees have important duties to act in accordance with wills and legal requirements.
4. Hybrid Trust
A hybrid trust combines features of both discretionary and fixed trusts. Some beneficiaries have fixed rights, while others receive distributions at the discretion of the trustee. This structure is suitable for investors who want fixed ownership with flexibility, families or business partners with mixed financial arrangements, and complex estates or businesses that require a balance of control and adaptability. Hybrid trusts require a clear trust deed to avoid disputes, and trustees must understand both fixed and discretionary responsibilities. They are often used in family businesses involving external investors and require careful tax and legal management.
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5. Charitable Trusts
Charitable trusts are created to support approved charitable causes. They ensure that assets and income are used only for charitable purposes and, if properly registered, can qualify for tax exemption. Individuals, families or organisations can use them to manage long-term donations or endowments, leave legacies or structure philanthropic activities. Trustees must manage assets responsibly, ensure that the trust only benefits charities, and comply with legal requirements under WA and federal law. Registration with the Australian Charities and Not-for-Profit Commission (ACNC) is often required, along with transparent reporting.
6. Special Disability Trusts
Special Disability Trusts assist immediate relatives or guardians to care for family members with a serious disability. This trust can be created by will or during the life of a relative, with contributions of up to $500,000 not affecting the beneficiary’s Social Security entitlement. The beneficiary must have a serious disability or medical condition, and the trust is designed to provide long-term support and financial security.
7. Unit Trust
A unit trust divides ownership into units, similar to shares in a company. The number of units held determines each beneficiary’s share of the income and assets. This structure provides a clear ownership model, allows new investors to join by purchasing units, and is commonly used for real estate investments and joint ventures. Beneficiaries are taxed on their share of income regardless of distributions, and this structure is less flexible than a discretionary trust to adjust income flows.
8. Managed Investment Trusts (MITs)
Managed Investment Trusts (MITs) are a type of unit trust where the public collectively invests in passive income-producing assets such as property, shares or fixed interest. MITs must meet certain ATO requirements. They offer tax relief, professional management, diversification and scalability for large projects such as commercial property portfolios. Individual investors do not control decision-making, management fees apply, and compliance requirements are strict, but MITs provide access to an institution
Advantages Of Trusts
Trusts provide numerous benefits that make them effective tools for managing assets and income. They offer flexibility in distributing both income and capital, allowing adjustments to suit the evolving needs of beneficiaries. Trusts establish clear methods for allocating assets, ensuring ownership and entitlements are properly defined. They can incorporate fixed rights while still offering discretionary flexibility, balancing certainty with adaptability. Trusts also allow assets to be managed according to the settlor’s intentions, which is especially helpful for supporting minor children or specific objectives. Moreover, they enable beneficiaries to access income and capital efficiently without requiring direct involvement from the trustee.
Conclusion
You now have a brief overview of the 8 types of trusts in Australia and how each trust is designed for a specific purpose. This is the stage where you can begin to assess which type of trust best suits your personal or business circumstances. Making the right choice can be challenging, and seeking professional advice can make the process easier.
Our team is focused on understanding your goals and providing guidance tailored to your situation. From initial setup to ongoing compliance and management, we support you every step of the way. Contact us today to schedule a consultation to manager the bookkeeping for your business with ease and clarity.
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