A trust is a legal relationship. It involves a trustee, as the legal owner of trust property, holding and dealing with the trust property for the benefit of others (beneficiaries).

A trust is not a separate legal entity and does not have the benefit of limited liability although it is common to install a company as the trustee.

Trusts used to carry on a business are frequently in the form of a unit trust or discretionary trust.

In a unit trust the beneficial interest in the trust is divided into defined portions or units. The holder of a unit is entitled to a fixed proportion of the profits (and possibly capital) from the trust. Trust units may be transferred in a similar way as shares in a company.

A discretionary trust is different in that the trustee has a discretion when distributing profits (and possibly capital) from the trust as to which of the potential beneficiaries should receive such distributions.

Before commencing business as a trust, a trust deed should be drafted by which the legal relationship of a trust is established over trust property in favour of beneficiaries.

Care should be taken when choosing a trustee to ensure that it has the legal capacity to hold property, namely that it is sui juris and not under a legal disability and is sufficiently skilled to understand the obligations and duties which follow from holding that role.

In a discretionary trust context, standard practice is to create a class of beneficiaries that is as wide as possible.

Consideration should be given to any required licences or registrations necessary to carry on a business in a trust structure, as well as registration of business names.

See Commencing a business as a trust.

Ongoing compliance in a trust structure will include the usual tax and revenue related lodgments, as well as compliance with business name registration rules.

Trustees should also have regard to their rights, powers and duties on an ongoing basis. Other practical ongoing considerations for trust structures include:

• identifying trust property so that it is clear what assets the trustee holding on trust and what assets (if any) it holds legally and beneficially in its own right; and

• exercising caution when it is proposed to amend the trust arrangements in a way which change the essential nature and character of the original trust relationship.

• See Ongoing compliance requirements.

Possible advantages of a trust structure include:

• flexibility for splitting income;

• estate planning;

• asset protection; and

• lesser levels of reporting and hence relative privacy.

Possible disadvantages of a trust structure include:

• their relative complexity, particularly if they are bespoke structures established for particular asset protection and succession planning motives;

• costs of establishment can be higher;

• a trust is not a separate legal entity and the trustee can be held personally liable; and

• trust structures can be difficult to restructure without adverse taxation and stamp duty consequences.

See Advantages and disadvantages of a trust structure.

Changing from a trust structure to another form of business structure will ordinarily involve a transfer of the assets and undertaking from the trust to the other desired structure. Tax rollover relief may be available in some cases.

See Changing to another business structure.