A Discretionary Trust (also referred to as a Family Trust) is one of the most popular types of Trusts in Australia.
It’s worth taking the time to learn more about how a Discretionary Trust works, and to consider whether it could have advantages for your own estate planning needs.
Or perhaps you’re wondering how to go about setting up a Discretionary Trust? We run through the key steps you need to take.
What is a Discretionary Trust?
Chances are that you’ve heard the term “Discretionary Trust” or “Family Trust” before and wondered what all the buzz is about. Trusts are not only for the very wealthy, or for those who understand the loopholes in our legal system. In fact, they’re used by lots of ordinary businesses and families in Australia as an important tool for achieving some - or all - of the following goals:
For some families, a Discretionary Trust also serves as a structure through which they can allocate financial resources to family members who have special medical or lifestyle needs and can’t provide for themselves.
Unlike a “Fixed” or “Specific Trust” - where the Trust Deed spells out exactly who the Beneficiaries are and how the Trustee should distribute entitlements - a “Discretionary Trust” is more flexible in regard to who can be a Beneficiary and how a Trustee can exercise their powers.
The ATO refers to Trusts as “a defining feature of the Australian economy” and has estimated that by 2022 there will be over 1 million Trusts in Australia. It’s clear that Discretionary Trusts make up a huge proportion of that number due to their popularity for business, investment and estate planning.
Who Should Use a Discretionary Trust?
Just like Wills, Discretionary Trusts are a way of managing and distributing family wealth (you can also set up a Trust as part of your Will - this is known as a Testamentary Trust).
An important factor which distinguishes Discretionary Trusts, however, is that they operate while key family members are living and can have a say in how they’re managed.
Here are some of the top reasons why you should consider a Discretionary Trust:
Despite the many benefits, however, there are some situations where a Discretionary or Family Trust is not the better option for investing or holding property. One example is that there is no land tax threshold exemption for Discretionary Trusts and real estate can sometimes be held in a more tax effective way outside of a Trust structure.
Seeking the advice of a legal, financial or tax advisor will help you work out whether a Discretionary Trust is a good fit for you and your family.
How Do You Set Up a Discretionary Trust?
Setting up a Discretionary Trust involves a number of considerations, from identifying who is to benefit from and manage the Trust, through to making sure all the legal and administrative requirements are in place in order for the Trust to become fully operational. As always, seeking expert advice is the way to go.
In simple terms, these are the key things you need to do to get a Discretionary Trust up and running:
Step 1: Decide what the Trust’s assets will be
Work out which property and assets you want the Trust to deal with and what the value of those assets are.
Step 2: Appoint a Trustee and identify the Beneficiaries
With Discretionary Trusts, the Trustee can be an individual, a company controlled by members of the family group or even a specialist third party Trustee company.
What’s most important is that you choose an honest and independent Trustee with the necessary skills to effectively manage all of the Trust’s affairs.
You will also need to make a list of who you want to benefit from the Trust (the Beneficiaries), and in what amounts or percentages.
Step 3: Create a Trust Deed
The Deed for a Discretionary Trust should be drafted with help from a professional. It needs to contain the following basic specifications:
Step 4: Complete the administrative requirements for a working Trust
Once a bank account has been opened, someone acting as a “settlor” (a friend, associate or advisor who is not a Beneficiary) must deposit the first “settlement sum” in the account to make the Trust operational.
After a Discretionary Trust starts operating, further contributions can be made and it can start to borrow, make investments and undertake a range of other functions.
A Discretionary Trust is another important way to secure your family’s future through estate planning. Although it involves an investment of time and effort and calls for professional input, it can be a perfect solution for many families, allowing them to protect assets, minimise tax, and more flexibly plan their financial affairs.
Thinking about getting started with Wills and estate planning? Start smart with Safewill.