One question clients often ask us is, “What is my position when my customer is a trust”? Trusts can cause confusion and misunderstanding, often because they are less transparent than other business structures and the concepts can be hard to understand. In this article we will help you gain a basic knowledge of trusts in a practical way and demystify some of the confusion.

Firstly, we think it helps in the understanding of a trust to look at a short history:

We have all heard of Robin (Hood) of Loxley, Little John and Maid Marian (probably seen the movies as well) and their exploits in Sherwood Forest. Allegedly, Robin was a crusader and went off to the Holy Lands to fight for king and country. When the crusaders left their castles and property behind, they would have others look after their land and hold onto it until the crusaders (hopefully) returned. Upon return, the holder of the land (i.e. the trustee) would then account to the returning crusader (i.e. the beneficiary) for the land and any income or profits made during their absence.

The law recognised this relationship where property seemed to be held by one party (the trustee) but it was actually owned by someone else (the beneficiary).

1. Basic Information of Trusts

What does the public think a Trust is? When we talk of trust, the public usually thinks of that state of mind where someone’s word is taken on face value; we accept what is said without lies or deceit involved, and we have faith in the person giving their word.

What does an accountant think a Trust is? We find a trust is often seen by accountants as a means of better structuring tax affairs.

What is a Trust to a lawyer? Legally, the word ‘trust’ refers to another concept altogether. A trust is a collection of rights and obligations; it is a relationship. Most times, a trust is created by a Settlor creating a written document – the Trust Deed. The Trust Deed gives you details of what powers the Trustee has (for example, power to invest, to buy and sell and hold property). It also provides for several obligations that the Trustee has to look after the trust property (for example, a Trustee can’t use the trust property for his/her/its own benefit). The main thing is that a Trust Deed will nominate who the Beneficiaries of the trust are and what trust property they are entitled to receive.

2. The roles within a Trust – Settlor, Trustee and Beneficiaries

This brings us to the important roles within a Trust. We have been speaking about Settlors, Trustees and Beneficiaries. So, who are they and what do they do?

Who is the Settlor? This is the person who creates the Trust by making an initial contribution for the benefit of the Beneficiaries. For example, if we were creating a Trust for a client in a family trust, we would suggest that a grandparent be a settlor. In a business context, the accountant organising the Trust is often the Settlor.  

Who is the Trustee? This is the person or company who holds the property on trust for the beneficiaries. For business purposes, the recommended trustee is a company because a company has perpetuity (i.e. it doesn’t die like a person).

Who are the Beneficiaries? These are the people who are entitled to the trust property. Whilst it looks to the outside world that the Trustee owns the property, the beneficiaries are the ultimate beneficial owners of the trust property. 

3. Trusts and Transparency

Why is it important? We’ve all heard of “piercing the corporate shield”. Think of trust transparency as an analogous concept. Remember, you need to get a ‘direct line of sight’ to the Beneficiaries who are behind the Trustee. This will help to protect your assets and preserve your positioning over other creditors if and when the Trustee becomes insolvent.

What can assist you in getting a “direct line of sight”?

1. Ask in your account application to find out whether your customer is operating as a trust. You should also have your customer warrant the accuracy of any information they provide you.That will give you a remedy if you have been misled.
2. If a company is involved, make sure you carry out both ABN and ACN searches so that you can be sure of the nature of your customer’s business trading vehicle.
3. Ask for a copy of the Trust Deed. Any accountant or lawyer who set up the trust will have copies. Have it checked by a trusted advisor/lawyer/accountant to see who the beneficiaries are and also the type of trust it is (discretionary, unit, trading, charitable etc.) Remember the beneficiaries are the true owners so it is important to know who they are so they can provide such guarantees or security as required.
4. Check for a right of indemnity against trust assets. Often you will find that assets of a company are no more than the value of its shares.
5. Carry out enquiries on any adult beneficiaries.Their credit records may cause issues when determining whether to grant credit or not. Best protection is getting personal guarantees from adult beneficiaries and ensure you have a charging provision in those guarantees as well to give you another layer of security.
6. Make sure you openany account in not only the name of the customer in its own capacity, but also in its capacity as a trustee. The company trustee is really wearing two hats – its acting as a company in its own right but also in its capacity as a trustee of a trust so that you have a right to the trust assets.

These steps should give you the “direct line of sight” and help position you over and above other creditors.

The concept of trusts goes back to medieval times, but with today’s tools there is no need to be blinded by any attempt to protect assets from creditors. Used properly, those tools can make trusts great again and give you that direct line of sight that you need for full recovery.

Disclaimer

This article is designed and intended to provide general information in summary form. The contents of this article do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as legal advice. Please seek legal advice about your specific circumstances.