What is a Discretionary trust?
The most common form of trust, a discretionary trust is created when the trustee has the discretion to choose who receives the trust property, and how much each of them get. A discretionary trust has 4 key parties.
A Settlor is the person who must sign the discretionary trust deed and ‘settle’ the trust for the benefeciaries’ benefit. The process involves a payment of a small fee (‘settlement sum’) to the trustee.
Once the settlor settles the property by paying the settlement sum and signing the deed, they cease to have any further involvement with the trust.
It is beneficial for tax purposes for the settlor to be someone who does not have a further connection with the trust. For that purpose, friends, lawyers or accountants make the best choice for settlors.
A Trustee is the legal (but not beneficial) owner of the property who holds the property for the beneficiaries and is responsible for the distribution of the property to them.
Trustees have certain rights, but in the case of a discretionary trust, they hold the power to determine the quantum and proportion of the benefit that each beneficiary receives. This is tremendous responsibility and when combined with the fact that trustees themselves can become beneficiaries in a trust, means it is crucial to select trustees with integrity as well as a deep understanding of their trustee obligations.
An Appointor has the responsibility of ‘appointing’ trustees and thus has absolute control over the trust. Sometimes the beneficiaries themselves can be set appointors.
Similar to determining a trustee, one needs to be careful when choosing an appointor, as they control the trustees. Therefore, it is a good idea to create joint appointors, or even an independent appointor to reduce bias.
Finally, beneficiaries are the potential recipients of the trust property. There is no limit to the number of beneficiaries. The beneficiaries will only be entitled to money when the trust deed includes them. Therefore, the trust deed often includes a broad description of the meaning of beneficiary to include the extended members of the family as well.
If you create a trust for your three children: Adam, Bella and Clare and your trustee is your lawyer.
Using your agreement, your lawyer will determine the splitting of the trust amongst your three children, however he wants. He could either split it in thirds, 50/25/25, or even 98/1/1. He has absolute discretion on the allocation of the property. However, he does not have a say in the class of beneficiaries. If the terms of your trust deed specify that the beneficiary class be your children, he would have to abide by it.
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