If you are thinking about setting up a discretionary or family trust but are unsure about the process of doing so, this article is a guide to help you navigate the journey of setting up a discretionary trust.

1. Decide Your Trustees and Beneficiaries

To set up your trust, you must be able to answer two key questions at the outset:

  • Who will act as my Trustee(s)?
  • Who will be my Beneficiary/Beneficiaries?

A trustee is a person or entity who legally owns and exercises the day to day control of the trust property. Their role is one of great responsibility. As a trustee owns the trust property, they can potentially be personally sued for their management of the trust. For this reason, it is preferable that a corporation acts as the trustee of your discretionary trust. A corporation’s limited liability means that absent any impropriety, the personal assets of the company directors will not be at risk in the event of legal action.

Your beneficiaries will benefit from the trust. They have no set interest in the trust property. Any distribution made to them is entirely at the discretion of the trustee. However, they do possess the right to receive correct and adequate information regarding the trustee’s management of the trust. It is preferable to name your beneficiaries as a particular class. In this way, the trust and the trustee possess some level of flexibility. For example, the trust can then include unborn children. Similarly, the trustee can potentially better plan for tax by allocating distributions to both high and low income earning beneficiaries.

2. Draft the Trust Deed

All trusts require a Trust Deed. Remember that the trustee legally owns the trust property. In this context, the trust deed structures and details how the trustee must manage the assets of the trust. A trust deed will also:

  • Nominate the date on which the trust formally vests – when the trustee finally distributes the trust assets
  • Provide adequate remuneration of the trustee in the conduct of their duties as trustee
  • Indemnify the trustee from the trust assets for their actions as trustee. 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 prudent when setting up a discretionary trust. As the beneficiaries have no formal claim on the trust property, it is problematic for them to bring suit in cases of maladministration. In these circumstances, an appointor can be a vital circuit breaker.

Given the importance and complexity of the trust deed, it is advisable that you obtain professional legal advice and assistance at this stage of the process. Only in this way will it reflect your wishes and best practice. While pro-forma trust deeds may be appealing in the short term, they could prove costly and inefficient in the long run.

3. Settle the Trust

You are now ready to settle your trust. To do this, a nominated Settlor signs the trust deed and gives the trustee a nominal fee. Ideally, your settlor should 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

At this stage in the process, the trustee must agree to act as trustee according to the terms of the trust deed. The trustee can best do this in a formal meeting.

5. Do your Duty!

Once your trustee has agreed to act as your trustee, you will need to stamp the trust deed formally and pay the requisite stamp duty. In Australia, all trust deeds attract duty. For example, in NSW the stamp duty is $500.00. Any additional copies of the trust deed will cost $10.00 each. Again, professional legal advice in your jurisdiction is invaluable. Your lawyer can pay the correct amount of duty within the designated period.

6. Take Care of 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. Be aware that this process is not instantaneous. Finally, you will need to open a bank account for the trustee in their name. Check with your preferred bank beforehand to ascertain what information and documentation it requires. Many banks will require an ABN.

Your discretionary trust is now established and fully functional. If you require any assistance with setting up a trust, get in contact with LegalVision’s business structuring lawyers. Call us on 1300 544 755.

Carole Hemingway
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