What is a discretionary trust?
A discretionary trust addresses the relationship in which one person legally owns an asset for the benefit
of another person or set of persons. The person who legally owns the asset is called the trustee, and the
person or persons for whose benefit the asset is held is called a beneficiary.
A discretionary trust is also known as a family trust. This is significant because the beneficiaries are all, or predominantly, members of the same family. The name ‘discretionary trust’ is derived from the role performed by the trustee. In a discretionary trust, it is the trustees job to decide the net income and capital which will be distributed to the beneficiaries named in the trust. This is done at his/her discretion. Thus the name, discretionary trust. The income tax, capital gains tax and asset protection advantages attached to a discretionary trust means that they are often the preferred method
of structuring a business or investment activity, even when the business or investment is only of modest size.
Some of the advantages of using a discretionary trust
A discretionary trust is a great tool for managing family wealth.
- A discretionary trust can be used to protect the assets of a family.
- A discretionary trust offers tax benefits.
- A discretionary trust can be used for estate planning purposes.
- A discretionary trust provides a secure environment in which assets can be held for future generations of the same family.
- Using a discretionary trust helps to streamline tax affairs and allocate family resources where best needed.
- Using a discretionary trust enables income to be distributed to companies and trusts associated with family members.
- A discretionary trust enables income with different tax characteristics to be streamed to family members individually. The structure can also be applied to non-family beneficiaries.
- Discretionary trusts are relatively cheap. Their simple structure makes them a popular choice for structuring business or investment activity.
Establishing The Trust (Individual or corporate trustee?)
- Having legal ownership of the trust’s assets in the name of the company makes it very clear that they do not belong to the individuals, and this means the are less at risk, particularly if the individual is in a risky business or profession;
- The company may stay in existence virtually forever, and will not die or become unable to manage its own affairs. This means things are simpler and there is less bother with changing trustees and re-registering ownership with authorities such as the various state Titles Offices;
- The directors or other persons who control the company can exercise defacto control without being personally involved in the trust.
In whose name should assets be held?
The trustee is the legal owner of the trust’s property. This means the trustee’s name should appear on all ownership documents, such as shares in private companies, units in private trusts, or title deeds for land ownership. You may add the tag “… as trustee for the (name) family trust” if you wish, and this has the advantage of informing or reminding all concerned that the asset is held on trust and does not belong to the trustee personally. However, in some cases this will not be possible. For example, most Title Offices will only register a title in the name of the trustee, i.e. the legal owner, and will not allow the tag “… as trustee for the (name) family trust” to be used.
Please obtain specialist tax advice from Elixir Wealth Advisory as your personal circumstances may vary.