How Do I Terminate a Discretionary Family Trust?

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Table of Contents

• Vesting of a Discretionary Family Trust
• Dissipation of a Discretionary Family Trust

A discretionary family trust is a type of trust. It involves the trustee having the discretion to distribute income or trust property to beneficiaries. As a common business structure, particularly in small business, this type of trust is generally established to benefit family members, to gain tax benefits and protect family assets.

There may be many reasons to terminate a discretionary trust, including costs, no unfettered discretion by the trustee, beneficiaries feeling powerless and personal liability of a trustee. LegalVision has a number of lawyers specialising in setting up and terminating family trusts. Termination may be carried out in several ways, the most common set out in this article.

Vesting of a Discretionary Family Trust

A trust deed should set out a perpetuity date, which is a date where the trustee may determine to terminate a trust. Prior to vesting, the trustee will determine how the assets will be wound up. It may include selling off the assets, distributing the surplus and discharging any liabilities. These powers are generally contained in the trust deed. A commercial lawyer familiar with trusts can provide advice on whether any transfers of trust property infringe on the rule against self-dealing by the trustee.

When vesting a family trust, accounts for the trust must be prepared and audited. This audit includes taking into account tax liabilities. After the trust is prepared, the trustee will then usually pass a resolution appointing the trust property to beneficiaries. For beneficiaries, any relevant interest will then be paid out or transferred accordingly, once any liabilities have been taken into consideration and addressed. Any transfers or sale of assets must be recorded, and once all trust property has been distributed per the terms of the deed, the trustee must record that the trust is at an end by resolution.

Dissipation of a Discretionary Family Trust

A trust fund or trust deed may not permit vesting. Where this is the case, a discretionary family trust fund may be distributed to beneficiaries, which ultimately terminates the trust. If all beneficiaries are of full legal capacity, the beneficiaries can agree to terminate the trust and execute a formal agreement directing that the trust fund is terminated and distributed in the agreed proportion.

The key steps in dissipating a discretionary family trust are:

• peruse the discretionary family trust deed to determine whether the trustee has the power;
• the beneficiaries must make a clear determination to take the distribution and their respective interests;
• the trustee appoints the property to the relevant beneficiaries;
• the beneficiaries execute a formal discharge of the trustee;
• the trustee transfers the relevant property to the beneficiaries; and
• the trustee declares that as the whole of the trust fund has been dissipated, the trust is at an end.