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A discretionary trust can offer many benefits to you as a business owner. If used correctly, it can, among other benefits, protect your assets from your business creditors and lower the tax you pay. Suppose you have decided to set up a discretionary trust to hold your personal assets, or as a business structure for your business. To help, this article sets out five considerations you should make before setting up a discretionary trust.
What is a Discretionary Trust?
A discretionary trust is a legal relationship between a trustee and a beneficiary, where the trustee holds a legal interest in an asset for the benefit of the beneficiaries. A discretionary trust is distinguishable from other types of trust structures, due to the trustee’s broad discretion to distribute the trust income. It can decide which beneficiaries receive a trust income and how much those beneficiaries receive. The beneficiaries cannot demand the trustee to make a payment to them.
Five Things to Consider
1. Ensure You Establish Your Discretionary Trust Correctly
The law requires you to take concrete steps to establish a trust properly. Not doing so could mean your trust is invalid. To properly establish a trust, there must be a clear intention to create a trust, and a person (called a settlor) must make a payment to the trustee (called settlement money). The settlement money becomes the first ‘trust fund’.
You can typically deal with the requirement to have a clear intention to create a trust by having precise wording to that effect in the trust deed. The trust deed is the document that sets out the terms under which you create the trust. The trust’s relevant parties must also sign the trust deed, and the trustee must pay stamp duty, depending on the jurisdiction where you establish the trust.
2. Who Are The Beneficiaries of My Discretionary Trust?
Beneficiaries of a trust are those who ultimately have the benefit of the trust assets. Therefore, you must consider who will become the beneficiaries of your trust. Most discretionary trusts have primary beneficiaries and then classes of beneficiaries. Primary beneficiaries are the beneficiaries who are identified explicitly in the trust deed by name. A class of beneficiaries are a class of people who you identify as being a beneficiary. Examples of a class of beneficiaries are the children, grandchildren, or descendants of a certain person. This helps to ensure certain categories of people are beneficiaries without having to identify them each individually.
3. Should I Use a Corporate Trustee?
A trustee can either be an individual or a company. A corporate trustee can have many benefits, including limiting your liability. As noted above, a trustee enters contracts and accepts liabilities on behalf of the trust. Thus, having a corporate trustee can limit your personal exposure to any of the trust’s liabilities. A corporate trustee is also easier to manage due to its perpetual life (unlike a human) and easiness to effect a change of control.
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4. What Powers Will the Trustee Have?
Notwithstanding the broad powers of a trustee, it must deal with the trust assets and the trust in general in accordance with the terms of the trust deed. Therefore, you should set out the powers a trustee has in the trust deed, especially regarding distributing the trust income. This is especially crucial where the trustee is likely to change in the lifetime of the trust.
Some terms that you should deal with in the trust deed are:
- the determinations a trustee must take before it distributes the income;
- how the trustee will manage any money that doesn’t fall within the trust fund;
- the remuneration for the trustee for managing the trust; and
- how the trust will pay costs associated with managing the trust like expenses and outgoings.
5. Do You Need an Appointor for Your Trust?
An appointor is the ultimate controller of a discretionary trust, because they generally can remove or appoint the trustee. It is not compulsory to have an appointor in a discretionary trust, but you may choose to have an appointor if appropriate for your circumstances. If you decide to have an appointor, you may consider having more than one appointor to balance the power. There should also be precise mechanisms in the trust deed to deal with circumstances where the appointor(s) becomes deceased or loses legal capacity.
Frequently Asked Questions
A discretionary trust can help protect your assets in the event of a bankruptcy, litigation or other legal procedures. This is because you are no longer the legal owner of your assets under a discretionary trust.
The beneficiaries of your trust will benefit from the assets in the trust. Therefore, you may want to select your children, grandchildren or other family members. However, you have the ultimate decision over who you select as a beneficiary.
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