There are many advantages to establishing a discretionary trust. Learning about what they are and how they work is crucial to deciding whether a discretionary trust is right for you.
This article provides an overview of how a discretionary trust works, including descriptions of the key roles in a discretionary trust and whether or not you should consider establishing one.
What is a trust?
The best way to understand a trust is that it is a relationship between the legal owner of the property of the trust (the trustee) and the beneficial owners of the property of the trust (the beneficiaries).
What is a discretionary trust?
A discretionary trust is a trust where the trustee has the discretion as to how to distribute the income and capital of the trust. The exercise of the trustee’s discretion is governed by the terms of the trust deed of the trust.
Why should a person establish a discretionary trust?
A discretionary trust has a number of advantages that make it a popular legal structure:
- it allows for flexibility in distributing income and capital of the trust;
- tax advantages, as income of the trust can be distributed to beneficiaries of the trust on lower marginal rates of tax, thereby reducing the tax payable overall by the beneficiaries;
- asset protection from creditors;
- controlling assets across generations
- it is an appropriate structure as an investment vehicle and trading entity (e.g. for running a business).
Who is involved in a trust?
The trustee is the legal owner of the trust assets, but not the beneficial owner of the trust assets. This means that the trustee does not receive the benefit of the trust (e.g. distributions of income or capital of the trust) in its capacity as trustee. The trustee must abide by the terms of the trust deed, deal with trust property and act in the best interests of the beneficiaries of the trust.
The settlor is the person who establishes the trust by giving the initial property to the trust. This is generally a nominal amount (e.g. $10). The settlor thereafter has nothing further to do with, and no further interest in, the trust.
The appointor (or appointer) is the person (or persons) named in the trust deed who has the power to remove and replace (i.e. appoint) a trustee. For this reason the appointor is the ultimate controller of the trust.
The beneficiaries of a discretionary trust are the persons for whose benefit the assets of the trust are held. They do not have an automatic right to the property of the trust as the trustee has the discretion whether or not to distribute income and/or capital of the trust to the beneficiaries.
What are the beneficiaries’ rights under a discretionary trust?
A beneficiary of a discretionary trust cannot compel the trustee to give them any of the trust property. However, beneficiaries have the right to:
- due administration of the trust;
- seek information relating to the management of the trust;
- request, but not require, the trustee ti exercise its discretion to make distributions to them;
- take the trustee to court if they deal with the property in a way which is not in accordance with the terms of the relevant trust deed.
Though complex, there are potentially significant benefits to establishing a trust structure. If you want more information about establishing a discretionary trust, LegalVision can set up a discretionary trust for a fixed fee price, we can also offer you fixed-fee online legal advice on whether or not a trust structure is right for you.
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