Discretionary (Family) Trusts
In a discretionary trust, the trustee can determine which beneficiaries receive the property or assets from the trust and how much each is to receive.
What is a Discretionary Trust?
A trust is a relationship where a person (called the trustee) is under an obligation to hold property for the benefit of another person (the beneficiaries).
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.
Why is it used?
Discretionary trusts are generally established for asset protection or tax purposes. The main advantages include:
o Estate planning for the benefit of members of the “family group” in the event of an unexpected death.
o 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).
o Tax minimisation as individuals are entitled to a 50% Capital Gains Tax exemption under a trust.
o Flexible and easy distribution of trust income and capital.
Steps to setting up a Discretionary Trusts
With the help of LawPath the following steps will be taken to create your discretionary trust.
a) Trustee Selection
The trustee (a person or legal entity) is the legal owner of the trust property. Although not having beneficial interest, the main obligation of the trustee is to manage the discretionary trust in accordance with the terms.
b) Create a draft deed using LawPath
c) Settling a trust
A settlor, one who must sign the deed and ‘settle’ the trust property, creates the trust deed for the benefit of the beneficiaries. This process requires the settlor to provide a small initial sum (usually $10) to the trustee.
A settlor is typically unrelated to the beneficiaries and may be someone like a close friend and one who has no further involvement after the settlement.
d) Signature requirements for a trustee(s)
It is required that trustee(s) accept the terms of the trust that they will be bound by and sign the deed upon agreement.
e) Payment of Stamp Duty and Stamping the Discretionary Trust
Stamp duty differs state by state and so applications are different within states and territories. In New South Wales, stamp duty of $500 is payable within three months of the trust being established.
Costs: the costs of stamping your discretionary trust are as follows:
ACT – Nil
NSW – $500.00 (due 3 months of the date of the deed)
NT – $20.00 (60 days of date of deed)
QLD – Nil
SA – Nil
TAS – $20.00 (due 3 months of the date of the deed)
VIC – $200.00 (due 30 days of the date of the deed)
WA – Nil
f) Apply for ABN and TFN
Upon establishment of the trust, an Australian business number (ABN) and tax file number (TFN) should be made for the trust. An application can take up to 28 days to process.
g) Open a Bank account
The final step is to open a bank account for the trust. The account should be opened in name of the trustee ‘as a trustee for the trust.’ The first deposit into the account should be the settlement sum. This sum should be there before any other deposits or transactions are made.
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Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.