Reading time: 7 minutes

Are you thinking about setting up a discretionary (or family) trust in Australia? Are you unsure how to do so or what the process involves? If so, look no further. This article provides you with a step by step guide on how to set up a family trust. This will help you to navigate through the journey of setting up a discretionary trust. 

1. Choose Your Trustees and Beneficiaries

First, you must answer two key questions:

  • Who will act as my trustee(s)?
  • Who will be my beneficiary/beneficiaries?

Trustees

A trustee is a person or entity who legally owns and exercises the day-to-day control of the trust. It is important that you choose someone that you believe is reliable. This is because the trustee is ultimately responsible for managing and administering the trust on behalf of the trust’s beneficiaries. For example, the trustee can invest the trust’s assets and enter into contracts and arrangements on the trust’s behalf. A trustee can also distribute the trust’s assets and property to beneficiaries at its discretion. 

You can choose between a corporate and individual trustee. An individual trustee has low set-up and maintenance costs. On the other hand, establishing and selecting a corporate trustee is more complicated. However, a corporate trustee has the advantages of additional protection of trust assets and ease in succession planning. Indeed, corporations are not living and the assets will remain constant, even if you replace a corporate trustee’s director. 

Beneficiaries

Turning to beneficiaries: the beneficiaries are the people or entities that will benefit from the trust. Essentially, they have beneficial ownership of the trust’s assets. 

While trustees have legal ownership over the trust’s assets, only beneficiaries have beneficial ownership.

In a discretionary trust, the beneficiaries have no fixed interest in the trust property. This means that any distribution made to them is entirely at the trustee’s discretion. However, this does not mean that beneficiaries have no rights. Indeed, beneficiaries have the right to receive correct and adequate information relating to the trustee’s management of the trust. 

It is preferable to name your beneficiaries as a particular class. Common classes named in a family trust include spouses or primary relatives. By naming your beneficiaries as a particular class, your trustee possesses a greater level of flexibility in determining who they can distribute the trust’s assets to. For example, the trustee can potentially better plan for tax by allocating distributions to both high and low income earning beneficiaries.

2. Draft the Trust Deed

The second step is to draft your trust deed. This is an essential step, as the trust establishes the trust deed and the legal rights and responsibilities of trustees and beneficiaries. The trust deed is a legal document that outlines the structure and management of the trust. It is important to remember that the trustee legally owns the trust property. Indeed, the trust deed should:

  • identify the trustee, beneficiaries and settlor of the trust;
  • nominate of the date on which the trust formally vests. This means it needs to indicate when the trust terminates and when the trustee must distribute all remaining trust assets. Usually, the vesting date is typically 80 years after the trust was first established;
  • outline the trustee’s roles and responsibilities; and
  • protect the trustee for liability incurred in connection with its role as the trustee by indemnifying them. However, this provision should exclude inappropriate and unlawful behaviour.

The trust deed can also nominate an appointor. An appointer has the power to remove or appoint a trustee. Having an appointer is a good idea when setting up a discretionary trust. As the beneficiaries have no formal claim on the trust property, it can be difficult for them to bring suit in cases where a trustee has not administered the trust properly. In these circumstances, an appointor can be a vital circuit breaker.

Given the importance and complexity of the trust deed, you should seek professional legal advice and assistance at this stage of the process. Advice from an expert will ensure you understand the contents of the trust deed and that you draft a document that suits your purposes.

3. Settle the Trust

The next step entails settling your trust. Settlement is a necessary legal process to establish your trust. To do this, a nominated settlor signs the trust deed and gives the trustee a nominal fee. The settlor should be an unrelated third party to the trust. For this reason, typically the settlor will be your accountant or lawyer. For income tax purposes, the settlor should not be a beneficiary of the trust itself.

4. Trustee Signs the Deed

The fourth step is to execute the trust deed. As part of the execution process, the trustee signs the trust deed and acknowledges its terms. It is essential for the trustee to read and understand the terms of the trust deed. The trustee must also voluntarily agree to act as trustee. Additionally, we recommend you sign the trust deed in a formal setting. For example, you can hold a meeting at your lawyer’s office. By doing so, you can ensure that all parties can attend and witness the signing of the deed. 

5. Trust Stamping

After you establish the trust and sign the trust deed, you may need to stamp the trust deed formally and pay stamp duty. Whether or not stamping of the trust and payment of stamp duty is required will depend on the state or territory in which you established the trust.

For example, you need to stamp discretionary trusts in NSW and pay the applicable stamp duty of $500 within three months of the trust’s establishment.

Again, professional legal advice in your jurisdiction is invaluable at this stage. Your lawyer can assist you in stamping the trust deed and paying the correct amount of duty within the designated period.

6. Let’s Get Down to Business

You are now ready to apply for a Tax File Number (TFN) and Australian Business Number (ABN) for the trust. You can apply for both online. Please be aware that this process is not instantaneous and you must do each separately.

Lastly, you need to open a bank account for the trustee in their name. It is important to check with your preferred bank beforehand to determine what information and documentation you require.

LegalVision NewLaw White Paper

An essential read for any lawyer interested in the future of law, this white paper covers a breadth of NewLaw topics including legal tech trends, benefits of legal process design, the future of legal outsourcing, case studies on smart contracts and key developments for NewLaw players.

This report will help lawyers and law firms navigate the NewLaw landscape.

Download Now

Key Takeaways

Setting up a family trust is not a straightforward process and involves many important decisions, so a lawyer is always recommended to guide you through all the steps. Specifically, you need to nominate trustees and beneficiaries. You must then draft the trust deed itself, settle, sign and stamp the trust. There are also some regulatory requirements you must follow, such as paying stamp duty and obtaining a TFN and ABN. 

So, if you have followed all these steps, your discretionary trust should be established and fully functional. Congratulations!

If you require any assistance with setting up a trust, get in contact with LegalVision’s highly experienced business structuring lawyers. Call us on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

Should I have a corporate trustee for my family trust?

It can be very beneficial to have a corporate trustee. People choose to have corporate trustees because the trustees’ liabilities are limited to the corporation’s assets. Generally, corporate trustees are shell corporations with no, or minimal, assets. This can be a safer bet if the trust incurs debts because creditors cannot claim personal assets. A corporate trustee also does not die, so there is no need to transfer a trustee’s assets if they pass away. Ultimately, however, this decision depends on your unique situation. We recommend that you speak to a lawyer who can give you tailored advice.

What is a trust deed?

The trust deed is a formal legal document, outlining details concerning the trust’s structure and management. It should identify the trustee, beneficiaries and settlor of the trust. Additionally, it should indemnify the trustee. It also needs to nominate the vesting date and the trustee’s roles and responsibilities. 

Who are the main parties to a family trust?

The three main parties to a family trust are the trustee, beneficiaries and the settlor.

Webinars

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

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

Online
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

Online
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

Online
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 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards