They are created under the law of equity, but The Australia Institute argues there is nothing equitable about the use of trusts.

"It's a bit over 0.4 per cent of taxpayers [that] account for 95 per cent of all the income from trusts," the left-of-centre think tank's David Richardson observed.

The latest Tax Office figures, analysed by The Australia Institute, show there are now more than 800,000 trusts with assets totalling more than $3 trillion.

The Australia Institute reckons the Government is losing at least $3.5 billion a year in tax due to trusts.

It's lost revenue shadow treasurer Chris Bowen wants to pull back.

"We need to make sure that our tax system is fairer, we need to ensure that it is returning more to the budget," he told the ABC.

Not that Labor is planning to get rid of trusts altogether.

"Trusts have a legitimate use in the economy: asset protection, succession planning," Mr Bowen said.

"Certainly, nobody's going to abolish trusts … but that doesn't mean that everything's set in stone for ever."

Opposition Leader Bill Shorten is expected to announce details of the new policy at the New South Wales Labor state conference this Sunday.

What are trusts?

But what are trusts, how do they work and are they used for anything other than minimising tax?

The first thing to realise is there are many types of trust, including trusts formed as part of wills when someone dies. It appears Labor is intent on changing the rules around "discretionary trusts" — generally family or business trusts.

Andrew Clements, partner at law firm King and Wood Mallesons, specialises in trusts.

"The trust is basically an asset-holding vehicle," he said — in other words, it's a place rich people can park their investments.

Why set up a trust?

But why not hold the assets in your own name?

Jonathan Philpot from HLB Mann Judd Wealth Management advises clients on why they might want to set up a trust, and he says there are a few reasons.

"Intergenerational transfer of wealth, where, perhaps, you wish beneficiaries to receive some sort of income benefits but not necessarily have control of the assets," he explained.

Put simply, you want to give your kids or grandkids a regular drip-feed of cash, often with strings attached.

Business owners also frequently use trusts to try and shield their assets from creditors, such as suppliers and banks.

Another group of business owners that commonly use trusts are farmers.

Barnaby Joyce was a rural accountant before becoming a member of Parliament, and he has come out stridently defending trusts.

"It means you've got better asset protection, that means if one of the kids gets divorced you don't lose the farm," he said, highlighting the sometimes problematic relationship between trusts and family law.

Sometimes trusts are used as a means to try and frustrate family law claims to split assets during a divorce, a practice frowned upon by the Family Court.

But Mr Joyce said it was more important farms aren't split up in divorce proceedings.

"It's incredibly important because basically these farms are there in perpetuity," he argued.

"People sort of nominally own them, but they're really just handing them on to their kids and then to their grandkids and then to their great grandkids."

A trust can allow the older generation to choose which of those kids or grandkids they pass the farm to.

How to minimise tax through a trust

But the most controversial — and many argue the main — use of trusts is to help minimise a family's total tax bill.

Not that Australian-based trusts allow people to completely avoid paying tax.

"They're what I would call tax-neutral structures," Mr Philpot said.

"The family trust itself doesn't pay any tax but it must distribute all the income through to either individuals or, perhaps, a company and they then pay tax at their appropriate tax rate."

But that's the key problem for the Tax Office and the main way trusts are used to minimise tax.

"Obviously you're looking to distribute more income to the lower-income earners to try to even out the overall taxable incomes as much as possible," Mr Philpot explained.

It's a practice known as income splitting or streaming. Here's how it works:

The high-income individual directs their earnings into a trust. These can't be wage and salary earnings, so they are generally business or investment income.

The trust then has to allocate all that income.

The trustee will generally make payments to those beneficiaries with the lowest incomes, who will pay the least tax.

"You can allocate that trust income anyway you like," explained Mr Richardson.

"You can divert some of it to your children, your retired parents."

That means you can make multiple use of the tax-free threshold and lower tax rates enjoyed by people on lower incomes.

Trusts can save tens of thousands of dollars in tax

Professor Robert Deutsch from The Taxation Institute gives an example of how much can be saved.

"A business with a taxable income of $180,000 earned by a sole trader would pay tax on 2017 rates of $54,432," he noted.

"By running that business through a discretionary trust, where distributions are made by the trustee to three adult family beneficiaries, the tax would be reduced to $33,141 (i.e. 3 x $11,407)."

In this example, the family is saving more than $21,000 a year in tax, every year, and the saving only gets larger for those on higher incomes and with bigger families.

They have to be adults — the tax law means payments to under-18s are taxed heavily.

For the maximum tax benefit, they also need to have no or little income of their own.

So it's a perfect tax minimisation structure if you have university-aged kids and want to help them with their fees and rent, or if you have retired parents you are helping to support.

But trust lawyer Andrew Clements said it means trusts aren't always a great tax dodge.

"The effectiveness of a trust depends on the availability of beneficiaries," he observed.

"Because that changes over time, the ability to get those tax savings will adjust over time."

It's also unsurprising trusts are overwhelmingly used by high-income earners, because you need to have a lot of money to make the set-up and administration costs of a trust worthwhile.

"You're probably looking at $300,000 or more to make the savings cost effective," wealth adviser Jonathan Philpot observed.

How to close off the tax loopholes

There are several options to close the tax loopholes.

One is to tax the trusts like companies but, by itself, that wouldn't make a big dent in income splitting.

"When the distributions come out, they're dividends in the way that a company pays a dividend," Mr Clements explained.

"They're franked and they carry the franking credits.

"If you did that in its pure sense, with refundable tax credits, it probably doesn't make a big difference to the amount of tax that's going to be paid by the trusts."

That's because lower-income earners would be refunded the difference between their marginal tax rate (which could be zero if they're under the $18,200 tax-free threshold) and the 30 per cent tax paid by the trust.

There are other ways to close the loopholes, such as attributing the income from the trust to the person who controls it, regardless of who the final beneficiaries are.

But it seems likely widely used, complex legal and accounting structures centuries in the making may take more than one policy announcement to pick apart.