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A trust is a legal relationship where 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 has the power (or discretion) to decide which of the beneficiaries are to benefit from the trust.

In this article, we set out the eight steps involved in setting up a discretionary trust. Note there are different types of trusts. For example, a discretionary trust is different to a unit trust and a hybrid trust.

Advantages of a Discretionary Trust

A discretionary trust is an important vehicle for a number of reasons. The table below summarises the key advantages.

AdvantageExplanation
Asset ProtectionThe assets of a discretionary trust are separate to the assets of the beneficiaries. As a result, the trust assets may be protected from creditors in circumstances where a beneficiary is sued or made bankrupt.
Tax PlanningThe overall tax paid by a family group or family members may be reduced by:

 

  • distributing income and capital to beneficiaries on lower marginal income tax rates (according to the rates set by the ATO); and
  • distributing different types of income to different beneficiaries (i.e. “streaming”).

Each beneficiary then pays tax at their marginal rate on trust income distributions received from the trust in each financial year.

Carry Forward LossesA discretionary trust may carry forward losses, in certain circumstances.
Capital Gains Tax DiscountA 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.

You may need to seek legal, accounting and tax advice to determine whether a discretionary trust is appropriate based on your circumstances. These are the steps you will need to follow to set up a discretionary trust.

1. Select Trustee

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

The trustee may be one or more individuals or a private (i.e. proprietary limited) company specifically set up 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. This will minimise the risk of personal liability (which is greater for individual trustees than for directors of a corporate trustee). Using a company also avoids unnecessary administration where changes must be made in respect of the registered owner of each trust asset where there are changes in individual trustees.

2. Draft Discretionary Trust Deed

There are several important issues that a discretionary trust deed should cover. Therefore, you should keep these in mind when you are drafting your discretionary trust deed. These include:

  • outlining who the beneficiaries are;
  • the determinations that the trustee can make and its powers in terms of income and capital;
  • any financial issues such as the trustee’s remuneration and how any taxes or other expenses will be paid;
  • any personal interests or liabilities; and
  • what happens in the event of a trustee’s appointment or removal.

You should ensure that your trust deed is suitable for your unique circumstances. Contact a lawyer to help you draft a professional deed of trust that is tailored to you. LegalVision can assist you with our experienced lawyers – simply fill out the form on this page.

3. Settle Trust

The settlor must sign trust deed and then give the initial settlement sum (usually $10) to the trustee.  The trustee can pay the settlement sum by cash or cheque.

The settlor is usually someone unrelated to the beneficiaries of the trust, such as an accountant 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.

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4. Trustee(s) Sign Trust Deed

The trustee(s) must hold a meeting accepting their appointment as trustee(s) of the trust. Here, they must agree 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 therefore applies differently in different states or territories of Australia. You should determine whether you need to pay duty by contacting the relevant revenue authority or seeking assistance from a local lawyer or accountant. Even if you do not need to pay duty, you may need to lodge the trust deed with the relevant revenue authority so they can mark that no duty is payable.

Stamping can be arranged either directly through the relevant revenue authority in your state or territory. You could also arrange it through a lawyer, accountant or other service provider that offers stamping facilities.

In New South Wales, you must pay stamp duty of $500 for each new trust within three months of the trust being established. This is in accordance with the provisions of the Duties Act 1997 (NSW), which is administered by the NSW Office of State Revenue.  If you do not pay the duty within three months then interest is payable until you do pay the duty.

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. It can take up to 28 days to receive these numbers.

7. Open Bank Account

You should open a bank account for the trust in the name of the trustee. This should occur after the discretionary trust has been established and the trust deed stamped (if stamping is necessary). The bank may require the trust ABN before it will open the account.

Once you have opened a bank account , the first deposit should be the settlement sum. You should deposit the settlement sum before making any other deposits or entering any other transactions.

8. Trust is Operational

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

LegalVision cannot provide legal assistance with this topic. We recommend you contact your local law society.

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