If you’re considering operating your business through a discretionary trust, it is important to understand whether and why this structure is appropriate for meeting your objectives. In particular, you may want to compare it to a fixed trust and other business structures.

At LawPath, you have access to a customisable and ready to use Discretionary Trust Deed.

Advantages and Disadvantages of a Discretionary Trust

In a discretionary trust (sometimes called a ‘family trust’), the trustee has the power to determine which beneficiaries receive the property or assets from the trust and how much each is to receive.

The discretionary power of the trustee is limited to a nominated class of beneficiaries that are outlined in the trust. Entitlement to assets is not predetermined and fixed, as is the case with a fixed trust. From a business standpoint, a fixed structure, such as a fixed unit trust, may be more appropriate where the beneficiaries are unrelated third-parties sharing property and shares. For more information, check out our guide on discretionary trusts to learn more about this structure.

It is always advisable to talk to a estate planning lawyer when establishing or altering a trust.

Advantages of a Discretionary Trust

Generally, a discretionary trust is established for the benefit of asset protection and tax purposes. Some potential benefits of this structure include:

  • Estate planning for the benefit of members of the “family group” in the event of an unexpected death
  • Property held in a trust is legally protected from creditors. A creditor cannot take trust property in bankruptcy or liquidation (unless the debt was originally a trust debt)
  • Tax minimisation as individuals are entitled to a 50% Capital Gains Tax exemption under a trust
  • Flexible and easy distribution of trust income and capital

Disadvantages of a Discretionary Trust

The advantages must be weighed against potential drawbacks of the discretionary trust structure, including:

  • Complexity in establishing and maintaining a trust structure
  • Only profits (not losses) are distributed
  • Vesting date: in NSW, trusts generally end after no more than 80 years; extending this date requires foresight in drafting the trust, otherwise, you may face costly court action
  • Investors are more likely to invest in a company structure rather than a trust structure

Next Steps

Deciding on a business structure is a necessary but often daunting step. Get a quick quote from our network of expert lawyers and ensure you’re on the right path to achieving your goals. LawPath also provides access to a customisable and ready to use Discretionary Trust Deed.

Still unsure? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 750+ expert lawyers or to get answers to your legal questions.

Zachary Swan

Zac is currently Head of Content at LawPath, Australia’s largest and fastest growing online legal platform. Since joining LawPath, Zac has assisted 1000s of startups and small business’ with their legal needs.