What should be included in a discretionary trust deed?

Firstly, what is a discretionary trust?

A discretionary trust is a trust where the trustee has discretion as to how to distribute the income and capital of the trust between the beneficiaries.

The exercise of the trustee’s discretion is governed by the terms of the trust deed of the trust. The trustee is required to comply with the terms of the trust deed and relevant State laws where the trust is established.

What is covered in the trust deed?

There are several important things that a discretionary trust deed needs to address and we have set these out for you below:

• Beneficiaries

The beneficiaries are the main people (or entities) intended to benefit from the trust and will be listed individually in the trust deed. The remaining beneficiaries are usually the spouse, any child, grandchild or great-grandchild, any spouse of a beneficiary, relative of the primary beneficiary including, but not limited to, a parent, grandparent, brother, sister, uncle, aunt, nephew or niece.

The deed should clearly outline who is to benefit from the trust, even though their distributions will be at the trustee’s discretion.

• Powers, capital and income

The deed should set out the determinations that can be made by the trustee and its powers in relation to income and capital, the reduction of income and capital to which beneficiaries are entitled, management of amounts not forming part of the trust fund, and the exercise of powers and discretions by a corporate trustee.

Having this clearly set out in the trust deed will help minimise disputes between the trustees and beneficiaries in the future.

• Financial issues

In each financial year, the trustee determines which beneficiaries will receive distributions of income and/or capital from the trust. Although the beneficiaries have a right to require the trustee to administer the trust in accordance with the provisions of the trust deed, they do not have the right to tell the trustee how to otherwise manage the trust.

The deed should indicate the remuneration that the trustee can expect to receive for looking after the trust. The remuneration may differ depending on if the trustee is a family member, or a corporate trustee, or a professional e.g. a lawyer or accountant.

The deed should also indicate how reimbursements of costs and expenses associated with the trust are to be paid including taxes, outgoings and other expenses.

• Personal interests and liabilities

The deed may indicate that where the trustee has a personal interest, they can continue to act despite personal interest, and may or may not require the trustee to disclose this.

The deed should also set boundaries for the liability of the trustee. Unless you are a professional trustee, there is often little benefit to being a trustee. To protect the trustee, provisions are usually incorporated so that the trustee is not liable in respect of income and capital losses.

• Appointment and removal

Things change and there may come a time where a trustee is no longer suitable or is unable to act as a trustee effectively. Accordingly, a well-drafted discretionary trust deed would address the appointment and removal of a trustee by setting out procedures for the resignation of the trustee, the vacation of the office of the trustee, and the removal of a trustee.

Conclusion

On the creation of your trust you should ensure that you have a detailed trust deed in place to outline all of the obligations of the trustee and the rights of the beneficiaries. As each discretionary trust is unique, you should ensure that your trust deed is tailored to your unique circumstances.