3 Ways to Terminate a Discretionary Trust

Australian businesses, investors and families regularly use discretionary trusts. A discretionary trust is a legal arrangement where a trustee holds and manages assets for the benefit of the trust’s beneficiaries. Discretionary trusts typically exist until reaching their ‘vesting date’. This is the date when the trust must be wound up and all assets distributed to beneficiaries. The vesting date of a discretionary trust is typically 80 years after you establish and settle your trust. However, you may choose to terminate your trust before its vesting date. This may be because you are finding the running costs too high, or the purpose of the trust has been fulfilled and it is no longer required. The most appropriate way to terminate your trust will depend on the terms of your trust deed and the reasons for termination. This article sets out three ways to terminate a discretionary trust.

What Is a Discretionary Trust?

A discretionary trust is a type of trust where the trustee has the discretion to decide how to distribute trust income between the beneficiaries. This is contrasted to a unit trust where the trustee does not have this discretion.

To establish a discretionary trust, the trustee and settlor prepare and sign a trust deed. The settlor is the person or entity who establishes the trust and should be a third party unrelated to the beneficiaries of the trust. The settlor must also pay the initial settlement sum (usually $10) to the trustee. In some states, such as New South Wales or Victoria, you must pay stamp duty on the trust deed.

Once you establish your trust, the trustee will be responsible for administering the discretionary trust according to the terms of the trust deed.

1. Revoking a Trust

The trust deed may give power to the trustee or settlor of the trust to formally revoke the trust. If the trust deed allows for the trust to be revoked, the trust deed should specify who has this power and the process for revoking the trust. 

The records of the trust should be updated accordingly and made available to the beneficiaries.

2. Terminating a Trust With the Consent of the Beneficiaries

In certain circumstances, you can dissolve a discretionary trust with the consent of the beneficiaries. If the beneficiaries have the legal capacity and are above 18 years of age, they may be able to compel a trustee to transfer the trust property to the beneficiaries and terminate the trust.

For this process to occur, the beneficiaries:

• have to agree on how to distribute the trust property and income;
• must formally decide to dissolve the trust;
• have the ownership of the trust property directed to them; and
• must discharge the trustee of the trust.

Following this, the trustee will declare and record the termination of the trust.

3. Court Order

In certain extreme cases, a court can make an order to dissolve a trust. For example, if the court decides the trust is a sham trust. This will be the case if it decides, for example, that the trust was established merely to avoid tax. 

A court can also make orders to vary a trust deed. It can also require the trustee to act in a particular manner or administer the trust in a certain way.