What is a Trust?
A trust structure is a tool for investors and businesses. The main benefit of a trust structure is that it provides flexibility. Income can be distributed to the lower income earner, assets can be protected and wealth can be passed onto the next generation with minimal fuss and little or no tax.
Trusts come in all shapes and sizes and there is no “one-size-fits-all” so be wary of anyone who says there is. The type of trust you use depends on many factors, including; type of asset or business, financing, income type, susceptibility to being sued and marital status.
While it’s not possible to cover every type of trust here, we will explain what a trust is. This basic understanding is often missing and therefore trusts and their usage become unnecessarily complex.
A trust is basically an agreement or promise. A person or company agrees to hold assets for the benefit of another. The one who holds the assets is called the trustee; those who benefit are called beneficiaries.
The trustee has legal control, which is legal title only. A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership, such as income or usage. It’s the trustee’s name that appears on all legal documents, bank accounts, etc.
The beneficiaries are not mentioned on such documents and have beneficial ownership, allowing a person to enjoy the benefits of ownership, including: usage, income, profits etc, even though legal title is in another name. Therefore the beneficiaries are entitled to the assets and profits of the trust.
The basic function of a trust is to separate control and ownership. The result is that asset protection is possible and profits can be distributed in the most tax effective way.
What you need to get your head around is this: when you establish a trust of your own, you have both legal control and beneficial ownership. Most people don’t separate the hats; they think they are one and the same.
For example, asset protection occurs because even though legal title is in the name of Joe Bloggs, Joe is trustee for a trust and therefore doesn’t own the asset – the assets are held in trust for the beneficial owners, hence nothing can be taken from Joe because he doesn’t own it.
Ownership plays a key factor in not just asset protection but within the tax system, too. This is why a ‘player’ will endeavour to own nothing and control everything!
There are many benefits to structures such as companies and trusts and they are just one way that a soloist can use trusts to his or her advantage.
What you need to know about business asset protection
It’s a sad fact that certain industries and professionals are more susceptible to litigation than others. While our firm certainly recommends asset protection for every business owner, we don’t recommend the following asset protection for every business.
Professionals such as doctors and soloists with considerable plant and equipment or, perhaps more likely, intellectual property are examples of businesses that should consider some form of asset protection.
As a note, before considering any asset protection one should have adequate insurance as a stop-gap.
With a business which has a tremendous amount of value in machinery, equipment or intellectual property, these items should be held separate from the trading entity. Below is an example.
If the professional or business is sued by either an employee or a client, the assets are protected because they are owned by a separate entity and used under a licence agreement.
In such a circumstance, all the business owner does is wind up the trading company, establish a new one and re-establish a new licence agreement, as demonstrated below:
A useful analogy is that the business is like a tree, with the main trunk being the most important part. Tree branches may fall off from time to time but the tree trunk continues to grow. All efforts and energy go into keeping the tree growing and not allowing anything to harm it. So it is with a business or investing – keep it growing and protected.
As far as what type of trust should be used, that depends on your personal situation. The point to note is:
Business assets should be protected in a separate entity, especially in highly litigable industries.