Understanding Trusts – A Comprehensive Guide

Trusts are legal arrangements where one party holds property on behalf of another. They are fundamental tools in Estate Planning, Asset Protection, and Wealth Management. This guide explores various types of trusts, how to set them up, their benefits and limitations, and other key aspects to help you understand how trusts can play a pivotal role in your financial planning. 

Types of Trusts involved in Estate Planning 

Discretionary Trust 

An arrangement where the trustee has the authority to decide how to allocate the trust’s capital and/or income among the beneficiaries is known as a discretionary trust.  Here the trustee has the flexibility to make decisions based on the circumstances.  

#1 How to Set up a Discretionary Trust? 

• The first step is to draft a Trust Deed that specifies the purpose of the Trust, Trustee powers and the Beneficiaries. 

• Then appoint a Trustee to manage the Trust Assets. 

• Thirdly Settle the Trust where the settlor transfers a nominal amount to establish the trust. 

• Final Step could be to register the trust with relevant authorities if required by law. 

#2 Advantages of Discretionary Trust 

• Protect Assets from creditors. 

• Flexibility in distributions. 

• Possible tax advantages from income splitting. 

#3 Limitations on Discretionary Trust 

• It may cause complexity in administration. 

• If the appointor role is not clearly defined there could be a possibility of Potential challenges in succession planning. 

Testamentary Trust 

A testamentary trust is created through a will and takes effect after the will maker’s death. It offers precise control over asset distribution and potential tax advantages. 

#1 How to Set up a Testamentary Trust? 

• Include Testamentary Trust in your Will. 

• Appoint a trustee to manage the trust after your death. 

• Define Beneficiaries in order to Specify who will benefit from the trust. 

#2 Advantages of Testamentary Trust 

• Asset protection for minors and vulnerable beneficiaries. 

• Tax benefits for beneficiaries. 

#3 Limitations on Testamentary Trust 

• There may be a possibility of legal challenges to the will. 

Family Protection Trust (Leading Member Discretionary Trust) 

A Family Protection Trust focuses on protecting family wealth and ensuring it remains within the family lineage. 

#1 How to Set up a Family Protection Trust? 

• Formulate a Trust Deed with specific provisions for family protection. 

• Appoint a Leading Member who has significant control over the trust. 

• Transfer your family assets into the trust. 

• Complete any legal registration processes if required. 

#2 Advantages of Family Protection Trust 

• There shall be proper Succession planning across generations. 

• Ensures the Strong asset protection. 

#3 Limitations on Family Protection Trust 

• It requires high complexity and administrative requirements. 

• There can be potential family disputes over control and benefits. 

The Common Features of Setting Up a Trust 

Firstly, you have to determine the purpose of the Trust which clearly defines why you need the trust and what you aim to achieve. 

• Then you have to choose reliable individuals or a corporate trustee as a Trustee to manage the trust. 

• Consult a legal expert to draft a comprehensive Trust Deed. 

• Next step is to legally transfer the chosen assets into the trust. 

• Finally, you must follow the legal procedures to register the trust to avoid any legal consequences. 

How to Appoint Someone as an Appointor? 

• Clearly outline the powers and responsibilities of the appointor in the trust deed. 

• Select a trustworthy Individual by choosing someone reliable and capable of making important decisions. 

• Officially appoint the individual (Appointor) in the trust deed and register if required. 

• Establish a succession plan for the appointor role to avoid any future disputes. 

Who are the Parties to the Trusts? 

• Settlor: The person who creates the trust by transferring assets into it. 

• Trustee: The individual or entity responsible for managing the trust according to the trust deed. 

• Beneficiaries: Individuals or entities who benefit from the trust. 

• Appointor: The person with the power to appoint and remove trustees. 

Trusts are multifaceted tools that can provide significant benefits in Estate Planning, Asset Protection, and Wealth Management. Understanding the different types of Trusts, their setup, benefits, and limitations, as well as the roles of various parties, is crucial for making informed decisions. By carefully planning and structuring trusts, you can ensure the protection and efficient transfer of your assets to your future generations.