Trusts | adradvisory

Trusts

A trust is a relationship where a trustee carries on business for the benefit of other people (called the beneficiaries). For instance, a trustee may carry on a business for the benefit of a particular family and distribute the yearly profit to them.

A trust is not a separate legal entity. A trust may be discretionary i.e. the trustee decides how the profit will be distributed amongst its beneficiaries or the trust may have fixed interests i.e. it will benefit certain people in predetermined proportions. The trustee of the trust may also be a company to limit liability.

Advantages

A trust provides asset protection and limits liability in relation to the business.
Trusts separate the control of an asset from the owner of the asset and so may be useful for protecting the income or assets of a young person or a family unit.
Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the distribution of income and capital gains among beneficiaries.
Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or partnerships.
Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal tax rates.

Disadvantages

Significant establishment and administration costs compared to sole traders and partnerships.
The trustee has a strict obligation to hold and manage the property for the exclusive benefit of the beneficiaries.
Operation of the business is limited to the conditions outlined in the trust deed.
As with companies, there are extensive regulations that trusts must comply with.
Losses derived in a trust are not distributable and cannot be offset by beneficiaries against other income they may have.
Unlike a company, a trust cannot retain profits for expansion without being subject to penalty rates of tax.