The Ins and Outs of Discretionary Trusts

A trust is a legal relationship in which a person or corporate entity (the trustee) holds assets on behalf of and for the benefit of one or more third parties (the beneficiaries).

The trustee is the owner of the trust property — not the beneficial owner — and can be a person, legal, or corporate entity. The trustee is responsible for ensuring the operation of the trust is in accordance with the terms set forth by the trust deed.

As its name might suggest, a discretionary trust (or family trust) affords the trustee some discretion when determining which beneficiaries are to receive income or capital from the trust, and how much.

Advantages and Caveats of Using a Family Trust

There are a number of advantages associated with using a discretionary trust as a vehicle for the transfer of wealth, such as:

1. Asset Protection

Any assets held in trust are regarded as separate from the assets of any beneficiaries with an interest in the trust and are protected from creditors in the event a beneficiary is sued or made bankrupt.

Only when the debt sought is a debt incurred by the trust will this not be the case.

Trust structures do not completely insulate assets from family law settlements however, particularly as outcomes are designed to be as fair and equitable as possible for both separating partners.

2. Capital Gains Tax Breaks

Discretionary trusts are often used to hold such assets that are likely to appreciate in value. i.e. property, land, shares, etc.

From September 1987, the Australian Government began taxing capital gains on the disposal of investment properties and commercial real estate.

Personal assets like the family home (or principal place of residence) are not taxed in this way.

Beneficiaries of a discretionary trust are afforded a 50 percent discount on any capital gains made from the sale of any assets held by the trust for a period greater than 12 months.

This discount only extends to beneficiaries classed as individuals — not companies.

Investment properties bought in personal names and transferred into a discretionary trust at a later date would attract capital gains tax.

*Please note that no part of this article is intended to be taken as taxation advice on the subject. You should speak to an accountant regarding your individual circumstances before making any decisions.

3. Succession Planning

A discretionary trust has the added advantage of being able to secure the distribution of a person or person’s assets as set out by their Will should any part of it be contested.

In addition, the trustee has the ability to quarantine specific assets from the Will.

And unlike a superannuation fund, assets held in a family trust are not necessarily locked away for years.

Setting Up a Discretionary Trust

There are six steps to setting up a discretionary trust. They are:

1. Appointing a trustee
2. Drafting the trust deed
3. Settling the trust
4. Signing the trust deed
5. Applying for an ABN and a TFN
6. Opening a bank account for the trust

Next Steps…

While the process appears straightforward, it is advisable you seek legal and taxation advice beforehand.

Should you be interested in establishing a discretionary trust, contact the team at Lewis Kitson Lawyers.