Reading time: 6 minutes

Running a business can be very rewarding. Ask any business owner. The Australian economy is built on the success of many small businesses. However, running a business carries many risks too. So, if you are a business owner, you must take proactive steps from the outset to limit your business creditors’ access to your personal assets, should your business run into trouble. Personal assets are any tangible or intangible assets of yours that are separate from your business assets. This can include, among others, your house, car and any publicly traded shares you own. One way to shield your personal assets from your business creditors is to set up a discretionary trust. Likewise, this trust will now own those assets. This article explores how discretionary trusts are beneficial for business owners from an asset protection and tax planning perspective. 

What is a Trust?

A trust is a legal arrangement where the legal ownership of an asset is separate from its beneficial ownership. The legal owner, called a trustee, may deal with the asset at its discretion. Yet, any loss or profit made from those assets is for the benefit (or loss) of the beneficial owner. This person is the beneficiary. The trustee is obliged to act in the best interests of the beneficiaries.

What is a Discretionary Trust?

A discretionary trust is a type of trust structure. It gives the trustee the discretion to distribute income from the trust assets to the beneficiaries as it deems fit. The trustee’s discretion includes choosing whether to distribute income to a beneficiary and how much to give

Likewise, discretionary trusts are particularly beneficial for business owners from an asset protection and tax planning perspective. The following section explains these benefits in greater detail. 

Asset Protection

Setting up a discretionary trust to hold your personal assets is a great way to shield the assets from your business creditors should your business run into trouble. 

Business Creditors’ Ability to Access Your Personal Assets

Irrespective of whether you have set up your business as a sole trader, partnership, or company, there are ways a business creditor can access your personal assets. To do so, the business creditor will need to establish that you are personally liable for your business’ debt. If they can establish this, the creditors can call upon you and potentially claim rights over your personal assets to satisfy that debt. 

Establishing a business owner’s personal liability regarding the liabilities of their business is straightforward in the case of a sole trader and a partnership. A sole trader and each partner in a partnership are personally liable for any debts and obligations of the business. Alternatively, a business set up as a company is a separate legal entity from shareholders and company directors. This technically separates your personal liabilities from the liabilities of the business. However, third parties often find a way around the separate legal personality of a company. For example, they may require the company’s directors to personally guarantee the obligations of the business as a condition of entering into contracts with the business. Lenders, such as banks, commonly ask for this kind of requirement.

Asset Protection in a Discretionary Trust

By setting up a discretionary trust, that trust holds your personal assets. Likewise, your business creditors cannot generally access those assets. For example, you could hypothetically set up a discretionary trust where you and your immediate family are the beneficiaries, and you or a company controlled by you is the trustee. Then, any creditors who have a claim against you (either in your personal capacity or your business) cannot access those assets held in trust by you. This is the case, despite you being a beneficiary or the trustee of the trust. 

The reason for this is that beneficiaries of a discretionary trust do not own the assets in a trust. Likewise, they also do not have any enforceable rights or interest in those assets. What they have is an expectation to be distributed an income at the discretion of the trustee. Additionally, the creditors cannot generally access the trust assets to meet the personal liabilities of a trustee, which that trustee did not incur in a trustee capacity.  

Importantly, note that there are some exceptions to these general principles. You should seek legal advice before setting up a discretionary trust for your personal assets. 

Tax Advantage

An added advantage of holding your personal assets in a discretionary trust is tax benefits. This is especially so if your personal assets include profit-generating assets like: 

  • investment property; 
  • shares in companies; or 
  • cryptocurrencies. 

As noted above, what distinguishes a discretionary trust from other trust structures is the power of the trustee to distribute the trust income to the beneficiaries as they wish. Hypothetically, you could set up a discretionary trust that holds your personal assets and the beneficiaries could be the members of your immediate family. If so, you may distribute any income from the trust assets among your immediate family members to minimise the tax you pay. For instance, you may choose to give the most significant proportion of the trust income for a given year to your child. Currently, children are taxed at a much lower tax bracket than adults. This is why discretionary trusts are often viewed as a tool for tax rate arbitrage. 

The Ultimate Guide for Startup Founders

The LegalVision Startup Manual provides guidance on a number of common challenges faced by startup founders including structuring, raising capital, building a team, dealing with customers and suppliers, and protecting intellectual property.

The guide includes 10 case studies featuring Australia’s top VC fund partners and leading Australian startups.

Download Now

Key Takeaways 

A discretionary trust is a type of trust arrangement. The trustee has the power to decide how much income from the trust is distributed to the beneficiaries, if at all. If you run a business, you may want to consider using a discretionary trust to hold your personal assets. Doing so may assist in shielding your personal assets from your business creditors should your business run into trouble. A discretionary trust can also provide tax benefits.

If you are interested in further discussing discretionary trusts and how they can help your business, LegalVision’s experienced business lawyers can assist. You can contact them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions

What is a discretionary trust?

A discretionary trust is a type of trust arrangement. Here, the trustee has power (or discretion) to decide whether to distribute trust income to a beneficiary and how much to distribute. It is different from a unit trust where beneficiaries hold a certain number of units in the trust. Likewise, the trustee must distribute any income from the trust in proportion to the number of units a unitholder holds in the trust.

How are discretionary trusts beneficial to business owners?

As a business owner, you are open to increased risk, should your business fail. Increased liability can come in the form of creditors seeking a debt repayment through your personal assets, like car or home. Hence, setting up a discretionary trust to hold your personal assets is a great way to shield the assets from your business creditors should your business run into trouble. 


How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Friday 13 May | 11:00 - 11:45am

If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer