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Discretionary Family Trusts (2021 Update)

Discretionary Family Trusts (2021 Update)

Discretionary family trusts allow a trustee to determine which beneficiaries receive trust property and in what amounts. Find out more here.

3rd March 2021
Reading Time: 3 minutes

Key points

  • Discretionary Family Trusts allow you to structure your finances and bestow property to chosen beneficiaries.
  • The trustee holds the trust property on behalf of the beneficiaries.
  • A discretionary trust means that the trustee can choose which beneficiaries receive trust property and in what amounts.

What is a Discretionary Trust?

A trust is a relationship where someone ( 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 only applies to a nominated class of beneficiaries which are in the trust.

Why establish a Discretionary Trust?

Discretionary family trusts are generally established for asset protection or tax purposes. The main advantages include:

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

How to set up a Discretionary Trust

To start your trust, it’s important to follow the below steps:

1.    Choose your trustee

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.

2.   Create a draft Trust Deed

Your Trust Deed will set out the key terms of your trust including:

  • Who the beneficiaries are
  • Who the trustee is
  • Duties of each party
  • Changing the terms of the trust
  • Winding up the trust

You can draft a Trust Deed online in a matter of minutes here.

3.    Settle the 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.

4.  Signature requirements for the trustee

It is required that trustee(s) accept the terms of the trust that they will be bound by and sign the deed upon agreement.

5. Paying stamp duty

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

6.    Apply for an Australian Business Number (ABN) and Tax File Number (TFN)

Upon establishment of the trust, an Australian business number (ABN) and Tax File Number (TFN) should be made for the trust. You can apply for an ABN online here and apply for your TFN on the ATO website.

7.    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 occur.

Conclusion

Discretionary family trusts are a popular option for family-run businesses. Trusts are not only tax and asset friendly, they also allow a trustee to determine how the trust property is given to beneficiaries. If you have further questions about starting a trust, we recommend that you get in touch with an Estate Planning Lawyer.

Don’t know where to start?
Contact a Lawpath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Author
Dominic Woolrych

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.