The Family Trust

Since this week's political football is the family trust, which I happen to know a couple of things about, I thought I would dispel a few myths regarding what it is, and what I think is happening.

Firstly, there's no such thing as the family trust if we're just looking at trust law. A trust is simply a legally binding obligation that a person (a trustee) has to another person (a beneficiary) with respect to legal and/or equitable (if we're being technical) rights the trustee holds, which are the subject of the trust. This broadly describes every kind of trust that isn't charitable (and even then it is not much different).

So, if you're a beneficiary of a trust, then that means a trustee holds property, money etc. for your benefit. It belongs to you in an indirect way, and you may (depending on the terms of the trust) be paid income from it.

Also, there's no such thing as a trust per se. It's not a company that exists as a separate legal entity from its shareholders. If you're a beneficiary of a trust then it's more akin to a legal relationship, like a contract, between you and the trustee. It's not the same as owning a share in a company.

The result is that you don't necessarily own the trust property. If property is held on trust for you, then the trustee owns it and you are simply entitled to the benefit of it: your ownership is indirect; like if someone has promised that they are going to invest their own money but give you the profits of it. Yet the trustee doesn't really own it either because it's held for your benefit.

Further, a trust may also be structured in such a way that, while you are stated to be a beneficiary of the trust, so are a bunch of other people (such as members of your family); and, the trustee doesn't ever have to give you anything: he or she might decide to give some of the money from the trust to your brother or sister. This means the trustee has discretion as to who should, in reality, benefit from the trust; and that is why trusts structured in this way are often referred to as discretionary trusts.

So, if you may never receive anything from the trust, but the trustee doesn't derive any benefit from it either (the property is held for the beneficiary 's benefit, not the trustee's), who should pay tax on any income generated by the trust property?

Now you can see why they're so popular as, broadly speaking, they can only be taxed when a beneficiary has actually received a direct distribution from the trustee.

Yet this isn't the only reason why discretionary trusts have been so useful, nor why "family trusts" are such an issue.

When a discretionary trust is used in the family context then tax law allows it, for tax purposes, to be classified as a family trust. This is still the same discretionary trust I've been talking about, but when it is used by families, tax law allows people to claim all sorts of extra tax saving goodies.

You see then, the issue is not the trust itself but the way our governments have passed a bunch of tax laws that, especially in the family context, have rewarded and incentivised the trust's use purely for the purpose of minimising people's taxes.

That's why the solution to this latest political issue isn't to abolish trusts (and anyone who says so is truly ignorant as to the myriad of ways they are used, e.g. your superannuation fund is a trust), but to correct the tax laws that promote them being used in ways that are, at least now, regarded as socially unacceptable.