Trusts can be a smart way to manage and protect assets, reduce tax liabilities, and plan for the future.
But if you’ve ever felt confused by the different types of trusts out there, you’re not alone.
In Australia, there’s no one-size-fits-all regarding trusts, and understanding the key differences can help you choose the proper structure for your needs.
Here’s a quick breakdown of the main types of trusts used in Australia:
1. Discretionary Trust (Family Trust)
This is the most common type of trust, especially for family businesses and investment purposes. In a discretionary trust, the trustee has complete discretion over how income and capital are distributed among beneficiaries. That flexibility can be helpful for tax planning and asset protection.
Who uses it? Families, small businesses, and individuals looking to manage wealth across generations or distribute income in a tax-effective way.
2. Unit Trust
Unlike a discretionary trust, a unit trust divides ownership into fixed units, much like shares in a company. Each beneficiary (or unit holder) is entitled to income and capital in proportion to their units.
Who uses it? Often used for joint business ventures, investments between unrelated parties, or property development where interests need to be clearly defined.
3. Hybrid Trust
As the name suggests, this trust combines a discretionary and unit trust. It allows for both fixed entitlements (like a unit trust) and discretionary income distribution.
Who uses it? Investors or business partners who want a blend of flexibility and certainty, but these can be complex and need careful legal and tax advice.
4. Testamentary Trust
This type of trust is created under a person’s will and only comes into effect after their death. It allows assets to be managed and distributed to beneficiaries (like children or grandchildren) under specific terms.
Who uses it? People planning their estate who want to provide long-term control, asset protection, or tax benefits for their beneficiaries.
5. Bare Trust
A bare trust holds assets on behalf of a beneficiary, who has the absolute right to the income and capital. The trustee’s role is minimal—they simply hold the asset as directed.
Who uses it? Often used for holding assets for minors until they reach legal age or in SMSF-related property arrangements.
Trusts can be incredibly useful, but they’re also complex legal structures with tax and compliance considerations. Choosing the right trust depends on your goals—whether it’s protecting family wealth, structuring a business, or planning your estate.
It’s always a good idea to speak to an accountant or legal advisor who understands the ins and outs of trusts before setting one up. With the right guidance, a trust can be a powerful tool in your financial toolkit.
