What is a Discretionary Trust?

What is a Discretionary Trust?

A trust is an agreement where the trustee (or legal owner) holds assets for the benefit of others (the beneficiaries). The Trust Deed sets out the terms entered into between the Trustee and the beneficiaries. In a discretionary trust (or family trust), the trustee has full discretion in relation to what and how much each beneficiary is entitled to.

A discretionary trading trust is essentially a discretionary trust set up to manage a family business. It is a common structure in Australia to run a business because it offers many taxation advantages such as the flexibility to distribute profits and dividends and the ability to access significant Capital Gains Tax concessions.

Parties

The main parties in a discretionary trust are:

  • Settlor – the person who set up the trust by setting aside a sum of money or property. Can be an accountant or lawyer but cannot be a beneficiary.
  • Appointer – controls the trustee. Has the power to appoint and replace the trustee.
  • Trustee – the legal owner of the trust asset. Can be a husband or wife or a corporation. Holds assets and investment on behalf of the trust and can decide on how much and what each beneficiary can receive.
  • Beneficiary/ies – the person/s who benefit from the trust. Beneficiaries receive income or capital at the discretion of the trustee.

The Trust Deed

The Trust Deed is the legal document that sets out the rules for operating and establishing the trust. It empowers the trustee to manage the trust and can include items like the fund’s objectives, a list of beneficiaries, and how benefits are to be paid out.

Trust Deeds must be prepared by a qualified lawyer as it is a legal binding document. It is signed by all the trustees and is governed by state and territorial laws.

Regular reviews and updates of the Trust Deed are required because tax legislation involving trusts are often changes.

When is a discretionary trust used?

A discretionary trust is usually set up for:

  • Tax benefits.
  • Asset protection.
  • Estate planning.
  • Protection from liabilities.
  • Continuity of business even in the event of the death.
  • Capital Gains Tax concessions.

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