Discretionary trusts: What are the benefits?
Before we discuss the ins and outs of discretionary trusts, let’s define what a trust is. A trust is a legal relationship whereby a person (Trustee) is obligated to hold property for the benefit of other people (Beneficiaries).
The terms of this obligation are defined by the Trust Deed and various state based legislation (e.g. the Trusts Act 1973 in Queensland). The Trustee is the legal owner of the Trust’s property, and the Beneficiaries hold a beneficial interest in Trust’s property. Trusts are often used to hold shares in a trading company, where the company runs a business, or to hold investment properties or similar assets.
What is a discretionary trust and how does it work?
In a discretionary trust the Beneficiaries do not have a fixed entitlement or interest in any assets or income of the trust. Instead, the Trust Deed defines the potential Beneficiaries of the trust, and the trustee can decide which people are to receive the capital and income of the trust, and how much each Beneficiary receives.
Discretionary trusts can have a wide range of potential beneficiaries including: companies, trustees of other trusts, or even unborn children.
What are the benefits of a discretionary trust?
- Stream income to lower tax rate beneficiaries
- Tailor the trust deed to the needs of the beneficiaries
- Facilitate flexible distributions of income and capital
- Access various small business tax concessions
- Employ principals and provide salary packaging for income distribution
- In some cases, protect the assets of the trust from outside forces e.g. divorce, bankruptcy
- Secure even more asset protection by appointing a company as the trustee
Are discretionary trusts the same as family trusts?
A family trust is usually established by a family member for the benefit of members of the same family. The terms ‘discretionary trust’ and ‘family trust’ are often used interchangeably, but there is a key difference. A family trust is a discretionary trust that has made a ‘family trust election’ for tax purposes, which has some tax impacts on the trust. This usually includes certain tax advantages, such as making it easier for the trust to carry forward losses from previous years, but it does impose several restrictions: the trust must pass the family control test, and must only make distributions to Beneficiaries within the family group.
Family trusts can help protect the family group’s assets from individual liabilities such as one family member’s bankruptcy or insolvency and provides the means to pass family assets to future generations. They can also provide a means of accessing more favourable taxation by ensuring income is distributed to those members who need it most and have the lowest income.
Want to start up a discretionary or family trust?
If you’d like more information on various trust structures and how they may benefit you, then contact Avis & Funk Law today. Our Gold Coast based legal team can help you find the most appropriate trust (or trusts) for your family and assets.