A family discretionary trust is set up to allow a person or a group to choose who can benefit from the trust and the amount the beneficiaries will receive. The amount of money that beneficiaries receive in a discretionary trust is not fixed; and neither are the beneficiaries who receive it. The trustee has the power to choose the beneficiaries of the trust, and how much they receive each year. The main source of income from a discretionary trust is from service activities, management activities or both.
Individuals commonly set up family trusts as discretionary trusts that hold a family’s assets, which may include owning a family business. One or more family members will manage the trust assets for their whole family. The trustee may choose who benefits from the trust, however, beneficiaries can only be family members because the trust is managed within the family.
Who is involved in a discretionary family trust?
The key players involved in a trust are:
- Settler: This person sets up the trust, and they are generally a lawyer or an accountant. After they do their job of creating the trust they usually have no further involvement and cannot benefit from the trust.
- Trustee: This is the legal owner of the trust. The trustee can decide on how to manage trust assets; and they make decisions and transactions relating to the trust’s management. For example the trustee may invest the trust’s assets and enter into contracts and arrangements on the trust’s behalf. They will make these decisions in the best interests of those benefiting from the trust.
A trustee can either be a corporate or individual trustee. Selecting a corporate trustee is complicated, however, they have the advantages of additional protection of trust assets and ease in succession planning. Even if the corporate trustee’s director is replaced, corporations are solid and the assets will continue to be constant.
- Appointor: The appointer is the person who is the director of the corporate trustee of the trust. The appointer has the power to remove and nominate trustees. This normally occurs when a trustee passes away or decides not to continue managing the trust. Having an appointer is a good idea when setting up a trust, as they can be a circuit breaker where a trustee has not divided the trust properly.
- Beneficiaries: These people benefit from the property in the trust, and they do not have ownership over its assets. They still attain a right to be considered when the trustee distributes money or property from the trust.
Discretionary trust creditors
An important consideration is whether assets from a trust will be reachable by creditors of beneficiaries. For example, a beneficiary may find themselves in a lawsuit or divorce after an estate plan is created. A discretionary trust can protect the trust’s assets from the reach of such creditors.
Lack of a beneficiary’s control is key to creditor protection. Creditors cannot convince a trustee to make distributions if the beneficiary could not. The court will normally not interfere on the behalf of the creditor if the trustee’s choice to make or withold discretionary distributions. A court will also not exercise its discretion to make distributions, and will respect the wishes of the trust’s creator who gave the trustee this authority.
How do you add a beneficiary?
It is ideal to name the beneficiaries as a class. Usually, classes of beneficiaries in a family trust fund are spouses or primary relatives. In doing so, the trustee will possess a higher level of flexibility in deciding who they can distribute the trust’s assets to. For example, the trustee may plan for tax by distributing to both high and low income earning beneficiaries.
How do you set up a trust?
If you are considering setting up a discretionary family trust in Australia, here is a step by step process on how to set up a family trust.
- Select who will act as your trustee/s, and who will act as your beneficiary or beneficiaries.
- Draft the trust deed. This is important because the trust establishes the trust deed and the legal rights and obligations of trustees and beneficiaries. The trust deed is a legally binding document outlining the management of the trust. The trustee legally owns the trust property. The trust deed should:
- Identify the trustee, beneficiaries and settlor of the trust
- Nominate the date which the trust vests. This indicates when the trust terminates and when the trustee has to distribute remaining assets. The vesting date is commonly 80 years after the trust was established
- State the trustee’s duties and responsibilities
- Protect and trustee for liability by indemnifying them. This provision should however exclude unlawful and inappropriate behaviour.
- Settle the trust. Settlement is a key legal process to establish the trust. The settlor will sign the trust deed and give the trustee a nominal fee.
- Execute the trust deed. In this process, the trustee signs the trust deed to acknowledge its terms; which must be read and understood by the trustee. It is recommended that the trust deed is signed in a formal setting, for example in a lawyer’s office. This ensures that all parties can attend and witness the signing of the deed.
- Trust stamp. Stamp the trust deed in a formal manner and pay stamp duty. This requirement will vary depending on the state or territory that the trust is established in. For example, in NSA you must stamp discretionary trusts and pay a stamp duty of $500 within three months that the trust is established.
- Apply for a Tax File Number and an Australian Business Number for the trust online. This process may be lengthy and each must be completed separately.
- Open a bank account for the trustee in their name. Remember to check with your bank to double check what documentation you require.
Professional legal advice in your state is crucial in the late stages of setting up a family discretionary trust fund. If you need assistance in stamping the trust deed and paying the correct amount of duty within the designated period, or further legal advice, contact Legal Kitz.
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