Key Functionality

Distribution of income or capital to beneficiaries, is made at the discretion of the trustee.

Until the trustee exercises its discretion, the beneficiaries generally have no interest in the property of the trust. A discretionary trust is sometimes called a family trust; (for tax reasons, however, a family trust means a trust that has made a family trust election).

Benefits of a discretionary trust?

The benefits of a discretionary trust include:
 Potential asset protection;
 The trustee has flexibility regarding the distribution of income and capital;
 Less regulation than a company;
 The trust deed can be tailored to the needs of principals and beneficiaries;
 Easier to wind up than a company

Creating a Discretionary Trust?

A discretionary trust is created when a person known as the settlor, gives the trustee money or property for the benefit of the beneficiaries. The settled sum is the original trust fund.

The settlor is normally a family friend and should not be a beneficiary of the trust, nor should they be anyone who could be seen to benefit or receive money from the trust. No other legal obligations arise for the settlor, who is not responsible in any way for the trustees actions.

The Trustee

The legal owner of the trust property, although not the beneficial owner, and is responsible for managing the trust fund. The Trustee owns the trust property but can only act in a prescribed manner in relation to it; this is set out in the trust deed and also in legislation.

The trustees overriding duty is to obey the terms of the trust deed. The trustee also has a duty to act in the best interests of the beneficiaries. There are many other duties imposed on the trustee by law.

As the trustee is personally liable for the debts and transactions they undertake on behalf of the trust, best practice is to use a company as trustee, for the following reasons:

 It is easier to effect changes of control;
 A company never dies; this saves the expense of transferring assets to new trustees on the death or retirement of the existing trustees; and
 The company will have no significant assets of its own which could be exposed to litigation. (however, the directors may be personally liable).

It is generally preferable for different trusts to have separate trustees. In order to protect each trust from potential deficiencies in the others.

The Appointor(s)

The appointor of a trust has the real power and control of the assets of a trust, including the power to appoint and remove trustees. In most cases, the original appointor are the parties for whose benefit the trust is established. Generally, having a number of joint appointors, possibly including an independent one, provides greater asset protection and succession planning benefits. Alternatively, a company could be made the appointor.

The Beneficiaries

The beneficiaries are the people (including entities) for whose benefit the trustee holds the property. They are identified in the Trust Deed. Beneficiaries have few obligations under the deed, however they do have recourse against a ‘rogue’ trustee through the courts.

The Discretionary Trust Deed

The general beneficiary clause is very wide, basically including almost anyone related by blood or marriage to the Primary Beneficiaries, as well as trusts and companies in which they may have an interest.

If no determination is made to distribute the income of the trust, the income will be held on trust for equal distribution amongst the Primary Beneficiaries. When the trust is wound up (which will be 80 years after the trust commences, unless the trustee decides to wind it up earlier) the trustee can distribute the assets of the trust fund as it thinks fit.

There are additional default clauses ensure that the income and capital of the trust can be distributed in the relevant circumstances even if no determination is made to that effect (and, in the case of the income of the trust, ensures that someone will always be presently entitled to the income for taxation purposes). However, it should be noted that adverse tax consequences may arise if a default beneficiary renounces their interest in the trust fund for any reason – such a beneficiary should seek advice before doing so.

The trustee’s powers have been drafted as broadly as possible, also allowing the trustee to act as if it is the sole and beneficial owner of the assets of the trust fund, and should include most situations that a trustee will encounter.

The trust deed allows income derived from the investment of property received from a deceased estate (and similar property) to be distributed to minor beneficiaries such that they retain their preferential tax status (i e. for the income to be taxed at adult rates).

There is a dispute resolving mechanism when there is more than one trustee (or appointor) and they can’t reach an agreement.

Resettling the Trust

A fundamental nature of the trust is changed, it is deemed that an entirely new trust has been created. The trustee may have the power to do this as a result of the powers conferred upon them in the Trust deed. Resettlement can occur where there are substantial changes to the fundamental nature if the trust, such as changes to the beneficiaries, trustees or trust property.

It is important to be aware of what may trigger a potential resettlement as there are significant tax consequences to consider. When resettlement occurs, for tax purposes, it is as if the property of the trust has been sold from the old trust to the new trust. This triggers potential CGT, Stamp duty and GST costs.

Summary

If you believe that any substantial changes are being made to your trust you should obtain professional advice before proceeding to ensure that what you are doing does not amount to a resettlement of the trust.

For more information please contact us:

e: lawyers@mcpgroup.com.au
p: (03) 9620 2001
w: www.mcplegal.com.au