Discretionary Trusts Explained: 4 Key People to Know

Despite common misunderstandings, a discretionary trust is not a legal entity itself – it cannot enter into contracts, and it cannot own assets. However, there are various entities involved in the creation and operation of a trust. Below, we explain discretionary trusts – their key players and their functions.

1. Settlor

The settlor of a trust is the person who initially gives money or assets (often known as the settlement sum) to the trustee of the trust to hold for the benefit of others.

Once the settlor has settled the trust by providing the settlement amount and signing the trust deed, it has no on-going involvement in the trust.

For tax reasons, the settlor should be someone with no other connection to the trust. People often choose a family friend or a lawyer or accountant to act as the settlor of their trust.

2. Appointor

The appointor is the person responsible for appointing and replacing the trustees of the trust. As such, they are seen as being the person with ultimate control of the trust assets. In many cases, the initial appointors include the parties for whose benefit the trust is established.

Extreme care you be taken when choosing an appointor as they have ultimate control over the trust. It is advisable to have more than one joint appointor, with the possible inclusion of an independent appointor. This provides greater asset protection and succession planning advantages.

However, to be effective, the appointors’ decision-making process should be unanimous. This will prevent a trustee in bankruptcy from removing the current trustee without the consent of the other appointors.

3. Trustee

Trustees are the legal (but not beneficial) owners of the trust assets. It is also the entity (or person) responsible for making distributions from the trust fund to the beneficiaries of the trust. Under a discretionary trust, the trustee can make distributions at its absolute discretion.

A trust is not a separate legal entity. Accordingly, the trustee of the trust takes on the duties in connection with the trust and is personally liable to creditors and accountable to beneficiaries.

There can be multiple trustees. Trustees can be individuals or companies. There are three reasons people often choose corporate trustees, namely:

1. It is easier to effect changes of control; and
2. The corporate trustee (if a true corporate trustee) should have no assets of its own which could be exposed to creditors of the trust; and
3. Succession reasons.

4. Beneficiaries

The beneficiaries of the trust are the potential recipients of distributions under the trust. A beneficiary will be entitled to receive a distribution only if the trustee chooses them.

The trust deed often broadly defines the term ‘beneficiary’. It usually includes some named primary beneficiaries together with general drafting to include the extended family of the primary beneficiaries.

***

It is important to understand the duties and responsibilities of the settlor, trustee, appointor and beneficiaries when setting up a discretionary trust. Ensure that you choose the right entity for each role for success planning, asset protection and limitation of liability. Importantly, if you have any questions, ask! You can get in touch with our business structure experts on 1300 544 755.