How To Terminate A Discretionary Trust
A guide to terminating a discretionary trust.
Trusts are used by many businesses and individuals. Despite this they still remain complicated and confusing. Just as starting a trust can be a complicated process, so too is terminating it. This article will discuss the ways that a Discretionary Trust can be dismantled.
In a trust there are the two parties. The Trustee who holds the trust property, and the beneficiary. The idea behind a trust is another party looks after or holds an asset for someone else. To describe what a discretionary trust is we can compare it to a fixed trust. A fixed trust is when individuals have fixed entitlements making everything predetermined. In contrast, a discretionary trust is not fixed. Therefore, since the entitlements are not fixed there is the accumulation of assets and wealth.Furthermore the trustee can change who and how much someone receives depending on the terms.According to the ATO a discretionary trust is can be divided into three. First is a discretionary trust where the primary source of income is from management and/or service activities. The next is if the income is from trading. Finally, if the income is from investment activities.
The easiest way to terminate a trust is to have a termination date in the trust. When the parties drafted the trust deed it may have had a vesting date. The vesting in the deed usually states whether the trust ends or not. This would commonly involve the trustee handing over the assets to the beneficiaries. However if the date has passed for vesting and the trustee has not acted then you may want to consult a trust lawyer.
Similar to vesting, assuming everyone is legal capable then they could make an agreement. The agreement would then be legally binding and thus dissolve the existing trust. Likewise, the trust may contain certain terms that allow parties like the trustee to revoke the contract and end the discretionary trust.
A breakdown in the trust could require litigation. The way to resolve this is to have a judge make a court order. This is one of the most expensive options and should ideally be avoided.
The trustee should make sure of some remaining factors. This relates to the beneficiaries right to the trust income. Furthermore the parties should take into consideration other factors like capital gains tax . Regardless, you can terminate a discretionary trust. You may even find your trust has a termination date already.
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Justin is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.