Trusts

One of the principal features of a trust structure is asset protection from creditors in the event of bankruptcy or legal action involving one of the beneficiaries.

They also provide clarity as to what happens should one of the beneficiaries die, and the beneficiary of a will owes no duties.

As attractive as a trust structure sounds, there is no opportunity to benefit from negative gearing should the property incur a capital or rental loss. Trust members cannot offset that loss against their tax liability for the year.

A discretionary trust has the freedom to decide which members (if any) will benefit from the trust’s income or capital growth from year to year. The trustee can consider each beneficiary’s tax position for the financial year and distribute benefits in the most tax-effective way. Family trusts are very often discretionary trusts.

A unit trust, on the other hand, is less flexible in terms of determining who receives the benefit. Units (or shares) in the trust are in a fixed ratio, and benefits are distributed accordingly. This form of trust is less tax effective but offers predictability for the unitholders.

Given the flexibility and opportunity that trusts afford investors to manipulate tax liabilities, the compliance and regulatory burden imposed by the authorities are more rigorous than for any other structure.