June 17, 2024
Trust Accounts

A Guide to Trust Accounts in Australia

In Australia, a trust account is a special type of account used to hold funds or assets on behalf of another party. There are several types of trust accounts you can choose from as an Australian. However, there may be detailed requirements that you have to meet before you can open certain types. Below, we explore some of them.

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Settlement trust

A settlement trust is a trust account conveyancers and solicitors use. This type of trust holds funds momentarily until they are disbursed to the relevant parties. People use settlement trusts to make sure the funds are accounted for properly, and that the transactions take place in a transparent and secure manner. This is because settlement trust accounts are compliant with local laws and regulations in Australia.

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Settlement trust providers offer regular updates on the balance of funds inside the account, and they provide documentation of transactions made.

Estate trust

An estate trust is trust account executors or administrators of deceased estates use to manage estate funds. Usually, the fund account belongs to a deceased person and the funds are simply waiting for distribution to beneficiaries of the estate.

Estate trust providers ensure these funds are properly distributed and accounted for during the administration of the estate. They also help to minimise the possibility of fraud or misappropriation of funds, as they are a neutral third party.

Client trust

A client trust is a trust account that professionals, such as lawyers, accountants, and real estate agents, use to hold funds for their clients. These funds serve a variety of purposes, such as for the payment of invoices or other future payments.

The professional holds the funds and ensures they are secure and in compliance with Australian laws and regulations. They also provide updates on the balance of the account and documentation of any transactions made.

Superannuation trust

A superannuation trust account holds and manages retirement savings for Australian workers. The Australian Prudential Regulation Authority (APRA) licenses superannuation fund providers, who manage superannuation trust accounts.

The funds held in a superannuation trust account are varied in type, from equities and bonds to property. The aim is for workers to grow their funds over time, and they achieve this by choosing an appropriate investment strategy for their risk appetite.

Usually, the superannuation trust provider discusses this with the worker and devises a strategy with the aim of maximising returns while balancing risk and preserving capital.

Unit trust

A unit trust is a type of investment trust that pools funds from multiple investors for the investment in a range of assets. These assets can include bonds, shares, property, commodities, and other instruments. A professional fund manager is responsible for the allocation of the investment, and they make the relevant decisions about the composition of the portfolio.

Investors in a unit trust hold units in the trust, and each unit represents a proportionate share of the trust’s underlying assets. The value of these units is directly linked to the value of the trust’s underlying assets and their performance in financial markets. The provider distributes the income generated by the trust to each of the unit holders.

A unit trust is a great way for investors to diversify their existing portfolios and start investing. This is because investors do not need to have the time or expertise, or even the resources, to get started investing through this method. There is also the potential for higher returns than traditional savings accounts.

Many people also refer to unit trusts as ‘managed investment trusts’ and use these two terms interchangeably. This is because they share the same structure and investment approach.

How to choose a trust provider in Australia

If you are looking to get started in growing, preserving or distributing your capital in a secure and transparent manner, a trust account is a great idea. However, not all trust providers provide the exact same services, and it’s essential to find one that suits your needs. Below are some considerations you should take if you do decide to embark on the journey:

Regulation

Firstly, you must ensure that the trust provider follows local regulations and licensing. In Australia, the Australian Securities and Investments Commission (ASIC) and the Australian Financial Services (AFS) oversee the regulations and licensing of trust providers. Choosing a well-regulated provider will help you protect your investment and ensure you are not violating any local laws.

Investment Offering

The next thing to consider is your investment strategy, and whether the trust provider offers it. Check out its investment offering and type of trusts the provider offers. Make sure you understand what your risk appetite and investment goals align with what you can get with the trust provider.

Performance History

Next, you should look at the trust provider’s performance history. You can usually find this on their websites, or you can request details on it. This performance history should include historical returns, risk-adjusted returns, and performance relative to benchmark indices. You are investing your hard earned money and you want to make sure you can maximise your potential for returns. This means working with a provider who can craft an appropriate strategy. Knowing what the performance history of a provider is can often give you some insight into the kind of returns you can expect in the future.

Fund manager expertise

Finally, regardless of whether you are looking to preserve or grow your capital, you should consider the experience and qualifications of the fund manager who will oversee your account. Choose a provider with a proven track record. If you are looking to create a specific type of trust account, you should also select a fund manager that has the relevant expertise.

Steps to take to open a trust

To open a trust account, you can take the following steps:

  • Choose a trusted provider: research and compare different trust providers to find one that offers the instruments you want to invest in, that match your investment goals and risk tolerance.
  • Complete an application: provide your personal information, such as your name, address, and tax file number, as well as your income and assets.
  • Provide identification: verify your account with proof of identity, such as your passport or driver’s license.
  • Agree to the terms and conditions: review and agree to the terms and conditions your provider sets out.
  • Fund your account: make a deposit into your account, either by direct debit, cheque or through third-party payment services. You should check with your provider the type of funding methods they accept, and you should look out for any fees or charges you may incur when you make the deposit.
  • Sign the trust deed: you often also have to sign a trust deed, which is a legal agreement between you and your provider.
  • Start investing: when you have set up and funded your account, you can begin investing. Your trust provider will manage your funds, and they will make decisions about your portfolio composition on your behalf, but upon your sign-off.

Closing remarks

All in all, opening a trust can be a great way to help you preserve or grow your funds. However, if you select a trust that involves elements of investing, you should remember that it carries risk. Your investments can go up or down, so it’s essential to be aware of these risks and determine if the investment is suitable for your circumstances.