A lot of people get confused between the different types of trusts. There is little difference, however, between a family trust and a discretionary trust.
What is a Discretionary Trust?
Discretionary trusts are trusts which are established by the person who sets up the trust (i.e. the trustee). The trustee has the power to choose, at his or her own discretion, the amount of money that will be paid to each beneficiary under the trust.
What is a Family Trust?
The term family trust is simply used to refer to a discretionary trust that is set up to hold a family’s assets, or to conduct a family business through a trust.
Read this article to learn a little more about family trusts and discretionary trusts.
Who is Involved in a Discretionary Trust?
There are 4 parties to the trust.
- The Settlor. This is the person that creates or sets up the trust. This person is usually an accountant or lawyer who helped set up the trust and generally has no further involvement with the trust.
- The Trustee. This person is the legal owner of the property in the trust. But he or she is not the beneficial owner. The trustee carries out the transactions required by the trust and makes decisions and signs documents on behalf of the trust. The trustee also owes a duty to the beneficiaries to act in their best interests. It is almost like a company, where the directors have an overriding duty to act in the best interests of the company and shareholders.
- The Appointor. The appointor of the trust has the power to remove and appoint trustees to the trust. This usually occurs when the trustee dies or is otherwise incapable of performing his or her duties.
- The Beneficiaries. These are the people that benefit from the trust money and/or property. Note that the beneficiaries do not have any interest in the money or property of the trust. What they do have is a right to be considered when the trustee makes a decision to distribute money or property from the trust.
Why Have a Discretionary Trust?
Many people set up discretionary trusts for asset protection, estate planning purposes, and more often than not, for tax benefits. As we are not qualified to give any tax advice, we encourage you to seek advice from an accountant in this regard.
Is There a Difference Between a Discretionary Trust and a Unit Trust?
Yes, there is.
In a discretionary trust, the trustee has the discretion to choose which beneficiaries receive payment and how much payment they receive.
In a unit trust, which is a fixed trust, the interests of each beneficiary are identified by the proportion of units that each beneficiary holds. This means that money or property from the unit trust is distributed to the beneficiaries in proportion to the units that they hold, and is not at the discretion of the trustee.
Can a Discretionary Trust and Unit Trust be Combined?
Yes, they can. A hybrid trust can be created by combining a discretionary trust and a unit trust. In a hybrid trust, the trustee has the power to distribute trust money and property among a nominated class of beneficiaries, much like a discretionary trust. However, this money and property must be distributed, as with a unit trust, in a proportional method.
Just as each family is different, each discretionary or family trust is also different. Trusts generally take their rules and operation from the trust deed, so each trust will have to abide by a different set of rules.
If you are unsure of how to set up a trust, or which trust is the most suitable for your circumstances, contact LegalVision’s business lawyers or fill out the form on this page.
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