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Retirement

Declaration of trust | Is it the same as a will or a deed?

  • June 18 2018
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Retirement

Declaration of trust | Is it the same as a will or a deed?

By Louise Chan
June 18 2018

Establishing a self-managed super fund (SMSF) requires signing many legal documents that is used to shape the trust fund. These documents can also determine the trustee’s scope and limitations in managing the SMSF.

signature on declaration of trust is it the same as will or deed

Declaration of trust | Is it the same as a will or a deed?

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  • June 18 2018
  • Share

Establishing a self-managed super fund (SMSF) requires signing many legal documents that is used to shape the trust fund. These documents can also determine the trustee’s scope and limitations in managing the SMSF.

signature on declaration of trust is it the same as will or deed

There are many declarations that the SMSF Trust and the trustees have to sign and trustees may get confused and complacent thinking that they’ve already filed the correct paperwork—only to find out they only signed a similar sounding document.

One of these documents is the Declaration of Trust—a very important document for SMSFs.


What exactly is a Declaration of Trust

A Declaration of Trust (sometimes referred to as ‘Bare Trust’) is a legal document that establishes the relationship between a trustee and the beneficiary. The declaration states that a trustee, whether individual or corporate, is merely the legal owner of an asset. The person who actually benefits from the asset is the beneficiary.

Both legal and beneficial owners must sign the declaration of trust before carrying out any action in order for it to be valid. A declaration of trust is essential for SMSFs when acquiring property through a limited recourse borrowing agreement (LRBA).

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You can use a Declaration of Trust over different kinds of trust assets, including:

  • Cash
  • Equities
  • Shares
  • Real property
  • Artworks
  • Collectibles
  • Other financial instruments


What are the limitations of a Declaration of trust

When it comes to SMSF purposes, a Declaration of Trust can be used is suitable for use where the asset is unencumbered. But if the asset will be geared, you cannot use this document.

In cases like this, it is advisable that you seek advice to find the best legal solution if your SMSF is borrowing money to purchase a geared asset.

Take note that the legal and beneficial owner must sign the Declaration of Trust before any other transaction, such as acquiring the financial asset. Failing to adhere to this will rule will result in the invalidation of the document. An acknowledgement of Trust is a more suitable document to use.

Who can act as a witness in a Declaration of Trust?

Similar to other legal documents, attestation or having a legal witness is a prerequisite when creating a Declaration of Trust. The good thing is that anyone can attest as long as meet the following criteria:

  • Age 18 years of age or older on the date filing the paperwork
  • A person who is not a party to the document

Similar documents

There are several documents that are often confused as a Declaration of Trust. To avoid confusion and help you differentiate a Declaration of Trust from them, we listed them below:

Trustee declaration
The SMSF Trustee declaration is a legal document that all trustees and directors of SMSFs must sign to accept their appointment and show that they understand the responsibilities of the position. It outlines the objectives of the Trust, the administrative and legal obligations of all trustees, and the investment restrictions for SMSFs.

When a person signs the trustee declaration, it signifies a legally binding promise to ensure that they will keep the SMSF in line with superannuation laws and be responsible for handling all assets owned by the trust.

The trustee can be jailed for breaching laws applicable to the SMSF if they signed a trustee declaration. A declaration of trust does not carry the same responsibility or burden of civil or criminal liability.

A person cannot be an SMSF member or trustee if they do not sign the Trustee Declaration, whereas the Declaration of Trust requires that the person must be an existing SMSF trustee.

Will or testament
A will or testament is a binding legal document that expresses a person’s wishes upon death. It must be created and signed when the person was of sound mind and body. To take effect, the writer-testator must explicitly state that the document and its contents functions as a will and two witnesses must sign as proof of its validity.

It is a document wherein a person explicitly states that they own assets, and they want to transfer legal ownership of those assets to specific people when they die.

The last will does not require a person to acknowledge and accept their role as a beneficiary and, in some cases, they are not even aware that they will receive an asset from the person who wrote the will.

A will is not a declaration of trust because the contents of a will reflect a person’s wishes towards their legally owned assets upon death. A declaration of trust splits property rights between legal and beneficial ownership before an asset is acquired.


Deed
A deed is a legally binding document that explicitly transfers ownership from the original to the grantee. Like a will, the grantee or recipient does not need to sign the document for it be considered valid. However, the grantee must accept the transfer of ownership before it actually takes effect.

A deed is similar to a declaration of trust in the sense that they are both contracts pertaining to property assets and their ownership status.

What differentiates a deed from the declaration is that deeds deal with a full owner (legal and beneficial) of property transferring full ownership to another.

Trust deed
The Trust Deed is also legally binding but unlike the documents discussed above, it isn’t just about ownership of assets in the trust. A trust deed actually functions as the SMSF’s constitution. Everything that trustees need to follow, including limitations in ownership of properties, loaning, and transfer of ownership, are outlined in the Trust Deed.

Trust Deeds are supposed to help keep the SMSF in line with existing and updated rules and regulations. It also adds additional limitations or allowances for SMSF trustees.

In a more simpler explanation, the Trust Deed is a constitution while the Declaration of Trust is for splitting ownership.

This information has been sourced from the Australian Taxation Office.

Declaration of trust | Is it the same as a will or a deed?
signature on declaration of trust is it the same as will or deed
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About the author

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Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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