What is a trust fund?

You’ve heard the words “trust fund” a thousand times but are not 100 percent sure of the technical meaning. You’re in the right place. A trust fund can, quite simply, be a fund that holds money or assets on behalf of an individual or group. However, over time, the way these funds have been used has become more and more sophisticated and, understandably, are subject to various laws and rules in relation to their administration.

What can be held in trust?

All kinds of assets can be held in trust – property, superannuation, shares and so forth. Sometimes fund are community managed, managed by industry bodies on behalf of members, Governments, or set up within families to support loved ones after the death of the primary asset holder. They can also be set up to facilitate investment by a community of interest – for example, property investors can contribute to a property trust. These people or entities do not need to know each other to be part of the same trust fund. The fund holds their money and allocates the earnings according to the terms of the fund. Another example may be a disaster relief fund where a charitable organisation establishes a fund into which members of the public contribute. The charity and the governing body of the fund then decide how to provide the funds to the people for whom the money has been collected.

Tax implications

Earnings you receive from a trust fund can contribute to your annual income and, as such, are taxable. That said, the structure of the fund may have already provided a tax benefit to the original asset holder or may help to reduce the need to incur capital gains and so forth if the primary asset is, for example, the property portfolio of a now-deceased grandparent. This may be in the form of a monthly payment to the beneficiaries based on leveraged assets. In this instance, sale of the properties may prove unnecessary – instead the inherited share of the asset can be passed further down the line.

Get financial advice

Financial planners, investment brokers and your accountant can provide detailed information about how being part of a trust fund could improve your financial situation. If you are considering buying a second property you may wish to seek advice beforehand about whether establishing a fund to purchase the property could be more tax effective in the longer term than buying it in your own name.