A trust is a legal relationship whereby one person (the ‘trustee’) holds assets for the benefit of one or more other parties (the ‘beneficiaries’). A discretionary trust (also known as a family trust) is a trust in which the trustee is given the power/discretion to decide which of the beneficiaries are to benefit from the trust.

A discretionary trust is an important vehicle for a number of reasons, which include:

  • Asset protection – the assets of a discretionary trust are distinct from the assets of the beneficiaries of the trust and may be protected from creditors in circumstances where a beneficiary is sued or made bankrupt;
  • Tax planning – by distributing income and capital to beneficiaries on lower marginal tax rates and distributing different types of income to different beneficiaries (i.e. “streaming”) the overall tax paid by a family group could be reduced. Each beneficiary is liable to pay tax at their marginal rate on income distributions received from the trust in each financial year;
  • Carry forward losses – a discretionary trust may carry forward losses, in certain circumstances;
  • Capital gains tax discount – a discretionary trust is entitled to a 50% discount on any capital gains made on disposal of any assets held by the discretionary trust for greater than 12 months. This discount is also available to individuals, but not companies.

Legal, accounting and/or tax advice may need to be sought to determine whether a discretionary trust is appropriate based on your circumstances. Set out below are the steps required to setup a discretionary trust.

1.       Select Trustee

The trustee is the person / legal entity responsible for administering the discretionary trust in accordance with the terms of the trust deed.

The trustee may be one or more individuals or a private (i.e. proprietary limited) company specifically setup to act as trustee. Despite the initial cost of setting up a company, it is generally recommended that a company act as trustee of a discretionary trust in order to minimise the risk of personal liability (which is greater for individual trustees than for directors of a corporate trustee) and avoid unnecessary administration (which requires changes to be made in respect of the registered owner of each trust asset where there are changes in individual trustees).

2.       Draft Discretionary Trust Deed

Contact a lawyer to help you draft a professional deed of trust. LegalVision can assist you, just fill out the form on this page.

3.       Settle Trust

The trust deed must be signed by the settlor, who must give the initial settlement sum (usually $10) to the trustee.  The settlement sum can be paid by cash or cheque.

The settlor is usually someone unrelated to the beneficiaries of the trust, such as an accountant, lawyer or close family friend. For tax reasons, the settlor should not be a beneficiary of the discretionary trust.  The settlor usually has no further involvement with the trust after the initial settlement.

4.       Trustee(s) Sign Trust Deed

The trustee(s) must hold a meeting accepting its/their appointment as trustee(s) of the trust and agreeing to be bound by the terms of the trust deed.

5.       Stamping

Stamp duty may be payable on the trust deed. Stamp duty is a state-based tax and so applies differently in different states or territories of Australia. You should determine whether duty is payable by contacting the relevant revenue authority or seeking assistance from a local lawyer or accountant. Even if no duty is payable the trust deed may need to be lodged with the relevant revenue authority for marking that no duty is payable.

Stamping can be arranged either directly through the relevant revenue authority in your state or territory or by a lawyer, accountant or other service providers that offer stamping facilities.

In New South Wales, stamp duty of $500 is payable in respect of each new trust within three months of the trust being established in accordance with the provisions of the Duties Act 1997 (NSW), which is administered by the NSW Office of State Revenue.  If duty is not paid within three months then interest is payable until such time as the duty is paid.

6.       Apply for ABN and TFN

Once the trust has been established an application for an Australian business number (ABN) and tax file number (TFN) should be made for the trust. An application for both an ABN and TFN can be made online through the Australian Business Register or with the assistance of an accountant or lawyer. This can take up to 28 days.

7.       Open Bank Account

Once the discretionary trust has been established and the trust deed stamped (if stamping is necessary) then a bank account should be opened for the trust in the name of the trustee as trustee for the trust. The bank may require the trust ABN before it will open the account.

Once a bank account has been opened the first deposit in the account should be the settlement sum. The settlement sum should be deposited before any other deposits are made or any other transactions are entered into by the trust.

8.       Discretionary Trust is Operational

The discretionary trust is now operational and is able to accept contributions (i.e. further settlement sums) and, subject to the terms of the trust deed, borrow money and make investments.

Key Takeaways

Setting up a discretionary trust is a pretty complex process. It’s a good idea to have a business lawyer guide you through the steps. Luckily, LegalVision can help! Call us on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Lachlan McKnight

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