Understanding Trusts: A Financial Foundation for Australian Doctors
For medical professionals in Australia, navigating the complexities of financial management can be challenging—especially when balancing the demands of a busy practice with long-term planning for wealth, tax, and asset protection.
We work closely with doctors across Australia to help them structure their financial affairs in a way that protects their assets, supports their families, and enables intergenerational wealth transfer. One of the most effective tools for achieving these outcomes is the strategic use of trusts.
But what are they? How do they work?
We’re here to provide a clear overview of trusts, why they are commonly used, and what you should be considering when establishing or managing a trust.
What Is a Trust?
A trust is not a legal entity like a company, but rather a legal relationship between three key parties: the trustee, the beneficiaries, and the appointor. In this relationship, the trustee holds and manages assets for the benefit of the beneficiaries, according to the terms set out in a legal document called the trust deed.
While a trust is a separate tax entity, it cannot enter into agreements or own property in its own name. Instead, it must operate through a trustee, which is the legal face of the trust in all transactions.
Key Roles in a Trust
Understanding the people and entities involved in a trust is fundamental to understanding how they work:
- Trustee: The trustee is the decision-maker and legal representative of the trust. They are responsible for the day-to-day operations of the trust, managing its investments, distributing income, and ensuring compliance with taxation and legal obligations. The trustee holds legal title to the trust’s assets but must act in accordance with the trust deed and in the best interests of the beneficiaries.
- Appointor: Often underestimated in importance, the appointor has ultimate control of the trust. This individual or entity can appoint or remove the trustee, amend the trust deed, and in some cases, even add or remove beneficiaries. Because of this power, it’s crucial to carefully consider who is appointed to this role.
- Beneficiaries: These are the individuals or entities (such as family members, companies, or other trusts) who are entitled to receive income or capital from the trust. Beneficiaries can be fixed (with a specified entitlement) or discretionary, where the trustee determines distributions annually.
Why do Doctors use trusts?
Trusts offer several strategic opportunities that make them particularly appealing for some medical professionals:
Asset Protection: In a profession where risk exposure and litigation are realities, trusts can offer a layer of protection by separating personal assets from practice assets or investments.
Tax Planning: Trusts allow for flexible income distribution, which can be a valuable tool in managing taxable income across family members or associated entities, sometimes reducing the overall tax burden.
Investment Holding: Trusts are commonly used to hold investments such as shares, managed funds, or real property. This can simplify ownership structures and offer continuity in the event of life changes.
Succession Planning: With proper structuring, a trust can form part of a long-term estate or succession plan, helping ensure wealth is preserved and transferred tax-effectively to the next generation.
Corporate vs Individual Trustees
One of the most important structural decisions when establishing a trust is whether to use an individual or a corporate trustee. While both are legally permitted, there are strong reasons to consider appointing a corporate trustee:
- Simplified Succession: If a trustee needs to be replaced, changing directors of a company is far simpler than transferring legal ownership of assets held by an individual trustee—particularly for assets like real estate or trading accounts, which can trigger capital gains events if not carefully managed.
- Limited Liability: An individual trustee is personally liable for the trust’s debts and obligations. In contrast, a corporate trustee limits personal liability and can help shield your personal assets.
- A Dedicated Company: Used solely for acting as trustee helps separate trust assets from personal affairs, which simplifies recordkeeping and compliance.
Tax Implications and Income Distributions
Trusts are considered flow-through vehicles for tax purposes. This means they generally do not pay tax on income they earn, provided that income is distributed to beneficiaries by the end of the financial year. The beneficiaries then declare this income in their personal tax returns and are taxed at their applicable marginal rates.
When a trust allocates income to a beneficiary, that beneficiary becomes presently entitled to the distribution—meaning they have a legal right to demand payment. Even if the distribution is not physically paid out, the obligation is recorded in the trust’s accounts, and the beneficiary must include it in their tax return for that year.
Additionally, a trust may make payments on behalf of beneficiaries—for instance, to cover education or living expenses. These payments are treated as reductions against the beneficiary’s entitlement and are still assessed as income.
Changing Trustees and Potential Pitfalls
While the flexibility of a trust is a key advantage, changing trustees can be complex in practice. Transferring control of the trust’s assets—especially real property or financial accounts—can trigger capital gains tax and stamp duty consequences if not handled correctly.
This is another compelling reason to consider a corporate trustee from the outset: changing directors of a company does not affect legal ownership of trust assets, helping you avoid unnecessary tax consequences or legal complications.
Final Thoughts
For doctors, trusts offer a sophisticated and flexible way to manage wealth, protect assets, and plan for the future. However, they must be set up and managed with care. The right trust structure—combined with clear legal advice and financial guidance—can provide long-term benefits for both your practice and your family.
We specialise in helping Australian medical professionals navigate the complexities of trust structures and other wealth-building strategies. If you’re considering a trust, or reviewing an existing one, we’re here to help you understand your options and ensure your structure aligns with your goals. Book in a free, no-obligation appointment with one of our expert tax team members here.
