What is a Discretionary Trust used for?
A discretionary trust (often referred to as a family trust when the beneficiaries are linked via family relationships) is one of the most common types of trusts in Australia. They are set up for one or more reasons:
- to protect the assets of a family
- to hold the assets for future generations of the same family
- to legally lower the amount of tax payable by the family unit as a whole, by being able to distribute income to companies and trusts associated with family members, some of which may have a trading loss, a capital loss or low income.
Other benefits include:
- a relatively low cost and simple structure to use
- the ability to stream income which has different tax characteristics differentially between family members
- the ability to use this type of structure for non-family beneficiaries. Please speak with us if this interests you.
There are three parties who must be identified when preparing the documentation for a discretionary trust. All of these parties must be legal entities. A legal entity may be one or more individuals, a company or an incorporated association. The individuals must be over the age of 18 years, not bankrupt nor subject to any other legal or mental disability (other than for beneficiaries).
- The settlor, whose role is to:
- invite a person to act as the first trustee
- settle some property on the trust
- determine the terms of the trust deed.
- The trustee, whose role is to:
- hold the assets of the trust in its name
- administer the trust, investing the trust funds and keeping its records
- distribute trust income and capital to the beneficiaries.
- The beneficiaries – beneficiaries don’t perform any function in a trust but must be clearly identified either by name or by relationship to at least one named individual. These include family members and companies and other trusts associated with family members.
An optional role is that of the appointor who, if the role is filled, has the power to remove and appoint the trustee and whose consent is a necessary pre-requisite to any changes to be made to the trust deed. As this is such a pivotal role, we recommend that the deed provides for a succession plan to cater for unforeseen circumstances. We offer tailored succession plans that can be set up with a single appointor, joint appointors or even family appointors. Find out more here.
The trust deed sets out the terms of the relationship between the trustee, the beneficiaries and, if the role is filled, the appointor. It can be used to dictate a variety of procedures or mechanisms in terms of the discharge of the trustee’s duty to the beneficiaries.