Discretionary trusts, often believed to be powerful financial planning and asset protection tools, have become integral components in many Australian estate plans.
These unique entities offer unparalleled flexibility, allowing trustees to make critical decisions about distributions based on the varying needs of beneficiaries.
This guide sheds light on their definition, operation, and the parties’ roles, ensuring a comprehensive understanding of how they might fit into one’s broader financial strategy.
What is Discretionary Trust?
A discretionary trust is a trust structure where the distribution of assets and income to beneficiaries is left to the trustee’s discretion rather than being set at fixed amounts.
The hallmark of a discretionary trust is the flexibility it grants to the trustee regarding asset distribution among beneficiaries.
This ensures adaptability to changing circumstances, making it a popular choice among Australians.
Who are the Parties Involved in a Discretionary Trust?
- The Settlor: The settlor’s primary role is to establish the trust by gifting a small amount (often a nominal amount like $10) to set the trust in motion. Once this act is completed, the settlor typically has no further involvement.
- Trustee: The trustee can be an individual or a company responsible for managing the trust’s assets, making distribution decisions, and ensuring compliance with all legal obligations.
- Beneficiaries: Beneficiaries are the individuals or entities that may receive distributions from the trust. Their entitlements are not fixed and depend on the trustee’s discretion.
Also read: 3 Essential Roles of a Will and Trust Attorney in Practice
What Are the Benefits of Establishing a Discretionary Trust?
Tax Advantages
Due to their attractive tax advantages, discretionary trusts have become a preferred choice for many Australians.
When the income generated by the trust’s assets is distributed among beneficiaries, especially those in lower tax brackets, the trust can capitalise on reduced tax rates.
This income-splitting mechanism can lead to substantial savings, as the trust’s income can be channelled to beneficiaries who will pay less tax.
Asset Protection
Beyond tax benefits, the protection of assets is a standout feature of discretionary trusts. Assets held within the trust are, in most cases, shielded from creditors.
This is especially advantageous for individuals in professions or businesses with high litigation risk.
By holding assets within the trust, these individuals can safeguard their wealth from potential claims or business liabilities.
Flexibility
Life is unpredictable, and personal or financial situations can change. By their very nature, Discretionary trusts offer a degree of flexibility that other trust structures may not.
The trustee has the discretion to decide the amount, timing, and recipients of distributions from the trust.
This adaptability ensures that distributions can be revised based on changing circumstances or needs of the beneficiaries, providing a dynamic tool for financial and estate planning.
Also read: What Are Testamentary Trusts and Why They Matter
What Are the Potential Limitations and Risks in a Discretionary Trust?
Lack of Fixed Entitlements
This means beneficiaries don’t have an automatic right to distributions. This can be a double-edged sword, offering flexibility but also potential uncertainty.
Legal Challenges
Discretionary trusts, especially regarding estate disputes, can face legal challenges.
If you’re concerned about someone contesting a will, our guide on preventing someone from contesting a will might be helpful.
Complexity and Cost
Establishing and managing a discretionary trust can be complex and may incur ongoing costs, including accountancy fees and potential legal consultations.
How Do You Set Up a Discretionary Trust?
Requirements: A discretionary trust in Australia requires a clear trust deed, a settlor, a trustee, identifiable beneficiaries, and trust property.
Drafting the Trust Deed: This crucial document outlines the trust’s operation and rules. It is advisable to consult with experienced estate planning lawyers to ensure it’s correctly drafted.
Registration and Reporting: Depending on the state, there might be a need to register the trust and comply with ongoing reporting requirements as outlined by the ATO.
How Do You End a Discretionary Trust?
Vesting Date: This is the date the trust ends, typically 80 years from establishment in Australia, though exceptions exist.
Dissolving the Trust: A trust can be dissolved if all assets are distributed and there’s a unanimous agreement among beneficiaries.
Distribution of Assets: Assets are distributed according to the trust deed or the trustee’s decision upon dissolution or vesting.
A Customised Discretionary Trust by Walker Pender
Approaching Walker Pender’s expert estate planning lawyers, the client presented a unique need.
With a diversified portfolio, including real estate and stocks, he desired to benefit his family and several cherished charitable causes.
Recognising that a traditional discretionary trust would align differently from his vision, especially concerning beneficiary selection and asset distribution to charities, Walker Pender’s team proposed a customized discretionary trust deed.
The deed uniquely divided trust assets into one segment for the family and another dedicated to charitable causes.
This ensured charities received a set annual income from the trust, with the remainder being discretionarily allocated to the family as per their needs.
Throughout, the client appreciated Walker Pender’s adept handling, resulting in a trust reflecting his aspirations, safeguarding assets, and ensuring significant impact.
Grateful, the client commended the team’s precision and commitment to his vision.
Want to Know What is Discretionary Trust?
Navigate the complexities with confidence by partnering with Walker Pender.
Our expert estate planning lawyers have the deep knowledge and experience to tailor solutions that meet your needs.
Ensure your assets are structured for the benefit of those you cherish while staying compliant with Australian law.
Choose Walker Pender for clarity and expertise.
