Skip to content

Investing with Trusts

Investing through a trust structure can be a great way to protect your assets and minimize your tax liability. However, there are also some potential downsides to consider. Here are some of the pros and cons of discretionary trusts and unit trusts:

Discretionary Trusts

A discretionary trust is a type of trust where the trustee has discretion over how the trust’s income and capital are distributed to the beneficiaries. Here are some of the benefits and drawbacks of discretionary trusts:

Benefits

  • Asset protection: Discretionary trusts can provide asset protection for the beneficiaries. This means that the assets held in the trust are protected from creditors and other legal claims.
  • Tax benefits: Discretionary trusts can offer significant tax benefits, including the ability to distribute income to beneficiaries in lower tax brackets.
  • Flexibility: Discretionary trusts offer a high degree of flexibility in terms of how income and capital are distributed to beneficiaries.

Drawbacks

  • Complexity: Discretionary trusts can be complex to set up and administer. They require careful planning and ongoing management to ensure that they are structured correctly.
  • Cost: Discretionary trusts can be expensive to set up and maintain. They require ongoing legal and accounting advice to ensure that they are structured correctly and that they comply with all relevant laws and regulations.
  • Risk of disputes: Discretionary trusts can be a source of family disputes if the beneficiaries disagree over how the trust’s income and capital should be distributed.

Unit Trusts

A unit trust is a type of trust where the beneficiaries hold units in the trust, which represent their share of the trust’s income and capital. Here are some of the benefits and drawbacks of unit trusts:

Benefits

  • Simplicity: Unit trusts are generally simpler to set up and administer than discretionary trusts. They require less ongoing management and are generally less expensive to maintain.
  • Transparency: Unit trusts offer a high degree of transparency, as the beneficiaries know exactly how much income and capital they are entitled to.
  • Ease of transfer: Units in a unit trust can be easily transferred between beneficiaries.

Drawbacks

  • Less flexibility: Unit trusts offer less flexibility than discretionary trusts in terms of how income and capital are distributed to beneficiaries.
  • Less asset protection: Unit trusts offer less asset protection than discretionary trusts, as the beneficiaries are considered to be the legal owners of the trust’s assets.
  • Less tax benefits: Unit trusts offer fewer tax benefits than discretionary trusts, as the income is generally distributed to beneficiaries in proportion to their unit holdings.

Who Should Use Trusts?

Trusts can be a great way to protect your assets and minimize your tax liability, but they are not right for everyone. Some factors to consider when deciding whether to use a trust:

  • Size of your estate: If you have a large estate, a trust can be a good way to protect your assets and minimize your tax liability.
  • Complexity of your financial situation: If you have a complex financial situation, a trust can offer a high degree of flexibility in terms of how income and capital are distributed to beneficiaries.
  • Risk of legal claims: If you are at risk of legal claims, a trust can provide asset protection for your beneficiaries.
  • Cost: Trusts can be expensive to set up and maintain, so you should consider the costs carefully before deciding to use a trust.

If you are thinking about setting up a trust or already have, talk to us today for a review of your requirements.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.