Legal Tip 282: Why are Trusts usually Started with just $10?

Discussion in 'Legal Issues' started by Terry_w, 1st May, 2020.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,841
    Location:
    Australia wide
    For a trust to exist the trustee needs to hold property for the benefit of other persons. Cash is ‘property’ and it can easily be transferred.


    The reason just $10 is used is that the settlor has to give the money to the trustee and not be reimbursed. The settlor is never able to benefit from the trust, for tax reasons. This means the $10 is essentially a gift from the settlor and you don’t want to push the relationship too far by asking them to settle a larger sum.


    The reason real property isn’t used as the initial property of the trust is because declaring a trust over land will be a dutiable event, usually, and trigger stamp duty. (note that does isn’t always the case, e.g. bare trustees). Declaring a trust over land will also be a CGT event.


    Note with Testamentary Discretionary Trusts (TDTs) the deceased person is actually the settlor and the settled sum is whatever they leave to the trust. This doesn’t trigger any stamp duty or CGT because of rollover relief for deceased estates.
     
    thydzik and Perp like this.
  2. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    6,011
    Location:
    Australia
    Inflation has been eroding that a bit?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,841
    Location:
    Australia wide
    That doesn't matter, it is still enough to kick start a trust.

    One thing that trustees should be wary of though is if put into a bank account and there are bank fees and no other property the $10 could be gone in half a year and the trust come to an end.
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    15,124
    Location:
    Sydney
    The common law elements of a trust include a requirement that the trust has assets ie the trust has trust property. Hence why a token sum ie $10 is referred to as a settled sum. There is no test of materiality. The value of trust property could be intangible in value and that could put the trust at risk eg a sheet of A4 paper has a immaterial value but could be considered not to have any value. Hence cash avoids that is it holds a store of value and remains an asset (unless its Zimbambwe maybe). It is a form of trust property that can be held, dealt with and given to beneficiaries. But this also can a limitation as terry mentioned. And why many will staple the cash to the deed cover and not bank it. Its old school but works well. I saw a deed just last week with a $10 pound note stapled to it from the early 60s. The trustees had asked a note collector who valued it at $80-$100 and that was affected by - the rusty staple holes !! Otherwise may have been worth $200 +

    This very issue comes up with SMSF formation. A SMSF deed wont include a settled sum as it is a different form of trust BUT the SMSF does not truly become a SMSF until a bank account is opened with initial funds of some cash. The ATO ask questions around this when applying for regulation as a smsf and a ABN. The ATO asks about cash or other property. This would need to be given by a member since a rollover cant be initiated that early ie a form of contribution. The danger is that can be dutiable or a contribution. And why cash is also a terrific way to initiate that form of trust or a disc trust. But not all trusts should be established that way.

    Care should always be taken never to "put" assets into a trust at formation. This could well be the sum settled and could be a substantial trigger for stamp duty and even double duty. eg never sign a declaration of trust or transfer assets into a trust without legal advice.
     
  5. thesuperman

    thesuperman Well-Known Member

    Joined:
    27th Jun, 2015
    Posts:
    404
    Location:
    Australia
    I remember listening to something a very long ago by Ed Burton that when a trust created, a bank account should be setup and the $10 deposited in that account so there's proof that in fact $10 was given by the settlor. Otherwise legally it could be argued that nothing was settled therefore no trust exists. Is this correct or not? I also believe it was mentioned that the trust deed must be stamped and duty paid or the trust deed is or could be invalid.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,841
    Location:
    Australia wide
    nope x2
     
    thesuperman likes this.
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    15,124
    Location:
    Sydney
    Unpaid duty is a different legal issue...an impediment... to that of being settled. Both could be a impediment but the duty may limit legal recourse to having the settlement determined.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,841
    Location:
    Australia wide
    A trust deed is still valid if not stamped, but cannot be used as evidence in court.