Money Matters: Dealings with trust assets

Now that we know where the trust assets come from, we should clue-up on how trustees can and should deal with those assets. You will notice that how the trustee deals with trust assets brings together a lot of knowledge obtained from previous blogs.

Remember those trustee powers and duties?

A while back we explored the powers of trustees, including investment powers. Subject to the trust deed, the trustee statutes in every state confer wide-ranging powers on the trustee to invest trust funds in any form of investment at any time. In fact, the trustee has a duty to invest trust money such that it is productive.

Allawdocs trust deeds provide the trustee with powers broad enough to satisfy the banks and other institutions when engaging in investment activities.

However, it is essential that the trustee also comply with all duties that it owes when engaging in any trust activities, including investment. Duties that are particularly relevant when the trustee engages in investment activities for the trust are:

(a)  Duty of care

When engaging in investment activities a trustee must exercise the standard of care, skill and diligence that a reasonable person would in managing the affairs of others.

If the trustee's profession is being a trustee or investing others' money, the trustee must exercise the standard of care, skill and diligence that a reasonable person engaged in that profession would in managing others' financial affairs.

(b)  Duty to act in the best interests of the beneficiaries

The trustee must exercise its powers in the best interests of present and future beneficiaries.

(c)  Duty to account

The trustee or its employed agent must keep a complete record of the trust's financial activities, supported by receipts.

How investment through a trust occurs

We are aware that the trustee can and must invest trust moneys on behalf of the trust, but how does this occur?

You will recall that a trust is not a body or mechanism with its own legal identity. Therefore the trustee will purchase and own trust assets, and hold them for the benefit of the beneficiaries. That is - the trustee has a legal interest in the trust assets, but the beneficiaries have a beneficial interest (except for beneficiaries of discretionary trusts, who have a 'mere expectation' to benefit).

When acquiring assets for the trust, the trustee should declare the purchase as being made on behalf of the trust. For example, when purchasing land, the trustee should disclose the name of the trust and that it is acting in its capacity as trustee on the Offer & Acceptance.

Payment for purchase of any new trust assets or investments will be financed by trust monies (proceeds from existing investments or sale of assets) or loans. Remember, the trustee has a duty to keep records of the trust.

How does a trustee choose a particular investment?

A trustee has broad powers to choose almost any trust investments, with few limitations.

Provided investment decisions are made in accordance with the trustee's duties, a court won't interfere with its investment decisions (if decisions are challenged). The trustee can make any kind of investment it wants, including selling trust assets and making investments out of jurisdiction (i.e. overseas). The exceptions to this are:

• if the investment is expressly prohibited by the trust deed;
• if the asset to be acquired is a 'toxic' asset - that is, an asset whose liabilities or potential liabilities exceed its value; and
• investing in shares subject to call.

As noted previously, when making investment decisions the trustee should have regard to:

• the purpose of the trust and the beneficiaries' circumstances;
• whether it is advantageous to diversify trust investments;
• the nature and risk of existing trust investments;
• the need to maintain the real value of trust assets;
• the risk of loss or depreciation of trust assets;
• the potential for investment appreciation;
• the likely time and amount of any return on investment;
• the duration of the proposed investment;
• the probable duration of the trust;
• the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment;
• the total value of the trust;
• the effect of the proposed investment on the trust's tax liability; and
• the costs associated with making the proposed investment.

Family discretionary trusts: Implications of investing through a trust rather than individually

Investing and holding assets under a family discretionary trust structure has  two main positive implications:

(a)  tax advantages;

(b)  asset protection.

Income earned by trust assets can be discretionarily distributed to family member beneficiaries each financial year. This can have income tax benefits because trust income can be distributed to family members in lower tax brackets, thereby minimising the overall income tax liability of the family.

Holding assets on trust also has capital gains tax benefits because the trust gets a 50% discount on capital gains on disposal of a trust asset. If the trust asset is held for less than one year and the asset is distributed to a beneficiary, this discount flows to the beneficiary.

Finally, holding assets on trust provides asset protection. Since a beneficiary of a family trust does not have a legal interest the trust assets, these assets cannot be realised to pay other liabilities (however family law matters may be a special case). Even where a distribution is made to a beneficiary, the beneficiary can request that the assets remain on trust and the trustee will invest those monies in accordance with the terms of the trust deed.

Pay attention!

It is essential that a trustee pays attention, analyses the circumstances carefully and makes the best available investment decisions in the interests of the beneficiaries. As we've noted a few times, the money to make investments has to come from somewhere and sometimes it is in the form of a loan. Keep your eyes peeled, we'll be reviewing this next time!

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