What is a Discretionary Trust?
When you establish a discretionary trust, the trustee will legally own an asset(s) for the benefit of one or more other people. A discretionary trust can also be called a family trust if the members/ beneficiaries are part of your family.
What is a Trustee?
The trustee is the person or entity who administers the Trust and is also the legal owner of the assets of the trust. The trustee decides on the income and capital which will be distributed to the beneficiaries of the trust. A trustee can be an individual or a company. The trustee distributes assets at their discretion, hence the name discretionary trust.
What is a Beneficiary?
A beneficiary is a person who benefits from the trust, e.g. the family of the trustee. Your trust may name one or more beneficiaries. They do not all have to be members of your family.
Why set up a Discretionary Trust?
You may decide to establish a discretionary trust as a way to distribute income because:
- It makes sense for tax purposes
- It is a strategy to manage family wealth
- It is a way to protect your assets
- You can use your trust for estate planning
- You want to allocate resources and income to family members
- It makes sense as an investment strategy
Many business owners face a degree of risk in owning a business, for example if the business fails, they may be sued personally or put at risk of bankruptcy. Similarly, those in partnerships, particularly those with bank debts, can face similar risks. Assets that are within a family trust are protected from creditors, so even if a claim is made against you, the assets are not in your name and therefore cannot be accessed in these circumstances.
Tax Advantages
Operating your business from a family trust and having the company act as trustee means you can retain the limited liability benefits of a company structure while taking advantage of the tax flexibility benefits of a family trust. When set up correctly, there are clear family trust tax benefits for individuals and businesses. Because the trust itself does not pay tax, beneficiaries are taxed based on the amount of income placed in their name (as well as any other income they may have from other sources).
The drawbacks of Discretionary Trusts
There are costs involved with establishing and operating a trust. It makes sense to manage it with the help of a professional and this is likely to incur fees. However, you may find you can immediately offset this cost from the tax benefits achieved. When beneficiaries have assets in a trust, if the trust experiences a loss in capital or revenue, it can’t be offset against their regular assessable income.
What are the steps involved in setting up a Discretionary Trusts?
These are the general steps required to establish a trust:
- Speak to your accountant or financial planner about why a trust makes sense for you or your business
- Determine which of your assets will be allocated to the trust and who will be the trustee/appointor/settlor/beneficiaries
- Work with the relevant parties (including a legal professional) to establish the trust deed and have it signed by the appropriate parties. All signatures need to be witnessed. The trust is officially formed on the date that the Deed is signed
- Stamp duty may be payable on the trust deed
- Apply for a Tax File Number (TFN) and an Australian Business Number (ABN) if necessary
- Open a bank account in the name of the trustee (but clarifying that this person is the ‘trustee of the trust’)
- Deposit the initial amount of funds (settlement sum) into the trust bank account
- Meet with a professional regularly to ensure the trust is being operated effectively and that it is compliant with current regulations
Whether you’re looking to keep your family home in the family or want to stagger inheritance distribution to ensure it’s not all spent at once, a family/discretionary trust prevents Will contests and secures assets. Assets held within the trust do not form part of a deceased estate preventing contests to a Will or your child’s spouse claiming their share of an inheritance.
A discretionary trust can provide long term financial support for your children or grandchildren, allowing you to invest in their long-term education and distribute family assets to future generations. A family/discretionary trust can also be a great way to protect vulnerable beneficiaries who may make poor spending decisions if they were to control their own assets.
How can we help?
If you have any questions or would like further information or you are seeking property tax advice, please feel free to contact our office via email –info@investplusaccounting.com.au or phone 02 9299 7000 to either speak with someone or arrange a time for a meeting so we can discuss your requirements in more detail. You can arrange a free 15 minute no obligation chat to discuss your options. Please arrange an appointment with our office by clicking here
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