Organising finances can become complex, but that’s a good thing.
As business grows, you will find single savings account and swipe cards may not be enough to keep the enterprise afloat.
Whether you foresee a large profit margin on the horizon or you simply want to make sure your money is distributed to your family according to your wishes, a trust is a must for all business owners.
Why a trust will benefit you and your SME
This legal framework allows an individual trustee to hold assets for the specified beneficiaries. Setting up a trust through a Trust Deed contract will safeguard your hard earned assets, or trust properties.
There are two different trust types you’ll need to know, depending on your SME’s immediate needs and objectives: unit and discretionary trusts.
In a Unit Trust, beneficiaries have a fixed interest in the income and capital that is subject to the Trust. In a Discretionary Trust, the beneficiaries’ rights are subject to the discretion of the Trustee. This allows the Trustee to distribute the income and capital with their discretion, for example, giving more of your wealth to a less financially well-off child to save money on taxes.
Both can help you shoulder the burden of financial responsibility. And by distributing your hard earned money to family, partners and stakeholders, you encourage them to take a further interest in your business without losing control of operations.
Luckily, knowing which of these to choose and getting the ball rolling isn’t as difficult as you may think. Here’s what you’ll need to get started:
A unit trust is a specific style of trust where each beneficiary receives a set percentage or ratio of trust property. There can be exceptions to this rule when unit trusts involve larger membership groups.
Think of a unit trust like you would a company. Where companies have stakeholders with fluctuating share prices, unit trusts have unit holders with changing unit values.
As the legal owner of the trust property, the trustee will usually be a Pty Ltd company with the small business owner or directors acting as key unit holders. The trustee will normally control day-to-day management of the trust, while also holding powers established in the Trust Deed.
As individuals or groups, unit holders receive a share of income or capital generated by the trust. As investors, they make an initial contribution to the Trust and can receive entitlements according to the Trust Deed.
It’s worth understanding that unit holders can be liable for debts incurred by the Trust, although this can be avoided by employing the services of an expert Commercial & Business Law representative to help you draft the Trust Deed correctly. Unit holders also have powers for appointing or removing Trust members.
A discretionary trust, also known as a family trust, is a tax-effective form of asset distribution within a family. The key difference here is the distribution of assets to beneficiaries isn’t in fixed ratios as it is in business or other trust situations.
Because the trust is discretionary in nature, there are no fixed entitlements as to how mum and dad (the Appointors) direct income distribution.
You could use a unit trust in conjunction with a family – for example, if the family trust acts as the unit holders in a unit trust – but keep in mind that a unit trust isn’t a substitute.
Another key difference is family trusts are only applicable for one family while unit trusts are suitable for multiple families, partnerships, joint ventures and businesses as a means of managing assets. You can easily build a Trust Deed that satisfies all your objectives with professional legal assistance.
Taylor & Scott is one of the most experienced and respected specialist law firms in New South Wales. With us, you can achieve peace of mind knowing that your case is in capable hands.