Discretionary Trusts

Advantages of Discretionary Trusts

Asset Protection

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 thosewith 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).

A family trust allows you to distribute profit amongst family members to utilise their income tax “tax-free thresholds”. If the business’ profits grow too large to distribute effectively, a family trust can also distribute to a separate company to cap the tax rate at 30 percent.

Keeping it in the Family

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 disretionary 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 do our trusts differ 

1. No vesting date

Unlike most other Trusts, we do not have an ‘Expiry Date’ of up to 80 years where the Trust by law needs to be wound up which may trigger Taxes such as Capital Gains Tax and Stamp Duty. The Trust can last in perpetuity with no tax bill surprises in future for family members still running the business.

2. Lineage Clause

This option stipulates that only bloodline relatives will be legally entitled to be beneficiaries of assets contained in the Trust in the event of a lawsuit or a family feud with in-laws. Combined with the ‘no vesting date’,the lineage clause allows for advanced asset protection, succession planning and estate planning.

3. Additional Asset Protection

The Trust does not specifically identify asset protection benefits which a Receiver in Bankruptcy may be able to use as an argument that the Trust was created to defeat creditors and as such loses asset protection capacity.  Asset protection arises from the Trust itself, not by specific wording. Combined with the use of a Corporate Trustee, there will be even greater asset protection and limited liability.

Discretionary Trusts: Disadvantages

Any income earned by the trust that is not distributed is taxed at the highest marginal tax rate. If you do find you are making a lot of profit as a family trust, those profits must be pushed out to beneficiaries. You could run out of beneficiaries and those beneficiaries will be paying highest tax rate.

With a family/discretionary trust, you can add additional beneficiaries if the trust deed allows for it, but care must be taken as capital gains tax and stamp duty may be triggered if done incorrectly. The trust cannot allocate tax losses to beneficiaries either.

When compared to distributions made either directly, or under family law trusts, this results in considerable reductions in the total tax payable when distributions are made to children or grandchildren – until they reach the age of 18.

Family Matters
Despite preventing some disputes within the family, there can be challenges in running the trust when other family issues occur. There can also be some complexities regarding succession planning and asset allocation upon the death of the trustee.

With a Will, you can dictate what goes to who, however, a family trust is separate to an individual’s will and you may be able to choose who controls the trust, you don’t dictate how they control it.

Negative Gearing

One of the disadvantages of a discretionary trust is the loss of some benefits associated with negative gearing investments through the trust. Namely, if a discretionary trust acquires a property and borrows to invest in that property, then any losses generated are accumulated in the trust and cannot be distributed to the beneficiaries.

This is not such a problem if the discretionary trust itself other sources of income has but can give rise to significant problems for, say, PAYG-type taxpayers who wish to acquire a property and negatively gear at the same time.

Obviously, the advantages of having the property owned by a discretionary trust may be outweighed in this case by the disadvantage of any negative gearing being generated in the trust itself. The development of a unit trust (one where
the discretionary nature is preserved in the trust deed but allows the issue of units) is an attempt to overcome this negative gearing problem.

 Who Are Parties To A Trust

The Trustee

The trustee can be an individual, individuals or a company and they are the legal entity who owns the assets and makes decisions on the trust’s behalf. There can be more than one
trustee and more than one beneficiary.

In most cases, the trustees are usually parents or a company that they own, And the beneficiaries are their children or dependants. The trustee owns and controls the business’ assets, distributes income, and must comply with the obligations of the trust deed and act with the best interests of the beneficiaries in mind.

The trustee is also responsible for registering the trust for tax purposes, lodging tax returns and meeting any other tax obligations on behalf of the trust.

Who will be Trustee?

Note as the decision maker, the trustee will be held responsible for actions by the trust, as is the case with any owner. We would normally recommend a company to be the trustee as the company would not own any assets and as such gives you an extra layer of protection, especially if you own assets in your name. If you as an individual are trustee, then your personal assets may be at risk in the event of legal action against the trust which insurance will or does not cover.

Beneficiaries

The beneficiaries are the people entitled to the income and assets of the trust. The beneficiaries of the trust are usually members of a family (family group), as well as companies and trusts that are controlled by that family. For example, the primary or default beneficiaries may be a parent or parents and the secondary beneficiaries maybe children, grandparents, companies etc.

The role of the default beneficiary is to receive and/or decide the direction of any funds that aren’t allocated by the trustee. It’s also important to note that you cannot change the default beneficiary without triggering capital gains tax and stamp duty.

Beneficiaries will generally include their share of the trust’s net income as income in their own tax returns and if they receive income from other sources they will be taxed for these as well.

Primary Beneficiaries

You need to identify the primary beneficiaries by name.Depending on the deed the beneficiaries can be changed at any time and you can make distributions to anyone even if you do not identify them here. With certain deeds there may be tax consequences so get this checked before doing so.

**Note

This article contains general advice only and does not take in account any person’s individual circumstances, needs or financial circumstances. This article is for general information only and must not be relied upon or as a substitute for legal or other specialised advice

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