How To Use Family And Discretionary Trusts

Discretionary and Family Trusts are used by many people and businesses in Australia. Here’s a post that may give you an idea what they are doing. But, everyone should get a good accountant to look at why first, before doing anything.

Uses of Discretionary & Family Trusts in Australia

This is important stuff.

Discretionary trusts are a versatile and powerful tool widely used in Australia for a variety of purposes. This includes asset protection, tax planning, and estate management. Their flexibility allows for tailored distributions and strategic financial planning. This makes them an attractive option for families, businesses, and investors. This article explores the common uses of discretionary trusts in Australia. We’ll highlight their benefits and applications across different contexts.

1. Family Trusts

Family trusts, a type of discretionary trust, are a popular choice for managing family wealth and ensuring its smooth transfer across generations. The key features that make family trusts attractive include:

Asset Protection: Assets held within a family trust are generally protected from creditors of the beneficiaries. This protection is crucial for safeguarding family wealth from potential financial threats.
Tax Efficiency: Family trusts allow for income splitting, where income is distributed to beneficiaries in lower tax brackets, potentially reducing the overall tax burden on the family. Talk to an accountant first, please. Or us!
Flexible Distributions: Trustees can make distributions based on the needs and circumstances of the beneficiaries, providing financial support when and where it is most needed.
Estate Planning: Family trusts facilitate the orderly transfer of assets to future generations, avoiding the delays and costs associated with probate.

According to Dal Pont, “Family trusts are a common vehicle for managing family wealth and providing financial security for future generations” (Dal Pont 125).

2. Business Trusts

Business trusts are another common use of discretionary trusts in Australia. They are employed to manage business assets, protect personal wealth, and provide for business succession. The benefits of using discretionary trusts for business purposes include:

Asset Protection: Business assets held within a trust are shielded from personal liabilities of the business owners, providing a layer of protection for personal wealth.
Tax Planning: Business profits can be distributed to beneficiaries in a tax-efficient manner, optimizing the overall tax position of the business and its owners.
Succession Planning: Business trusts provide a structured approach to transferring business ownership and management to the next generation, ensuring continuity and stability.
Flexibility: Trustees can make strategic decisions about distributions and reinvestments, adapting to changing business conditions and opportunities.

As noted by Lang, “Business trusts offer significant advantages for small and medium-sized enterprises (SMEs) in terms of asset protection and tax planning” (Lang 67).

3. Investment Trusts

Investment trusts leverage the benefits of discretionary trusts to manage and grow investment portfolios. These trusts are used to hold a variety of investment assets, including shares, bonds, and real estate. The advantages of using discretionary trusts for investment purposes include:

Tax Efficiency: Investment income and capital gains can be distributed to beneficiaries in lower tax brackets, reducing the overall tax liability. This is quite technical and does not happen by itself. You’ll need a careful accountant to assist you with this if you don’t want to get in trouble.
Asset Protection: Investment assets held within a trust are protected from the personal creditors of the beneficiaries.
Flexible Management: Trustees can make strategic investment decisions and distributions, adapting to market conditions and the financial needs of the beneficiaries.
Long-term Planning: Investment trusts provide a vehicle for long-term wealth accumulation and intergenerational wealth transfer.

Lang states, “Investment trusts allow families to manage their investment portfolios efficiently, providing tax benefits and asset protection” (Lang 112).

4. Charitable Trusts

Charitable trusts are established using discretionary trust structures to support philanthropic activities and charitable causes. These trusts offer several benefits:

Tax Deductions: Donations to charitable trusts may qualify for tax deductions, reducing the donor’s taxable income.
Flexible Support: Trustees can allocate funds to various charitable causes based on evolving needs and priorities.
Legacy Planning: Charitable trusts allow individuals and families to create a lasting legacy, supporting causes they care about for generations.
Asset Protection: Assets held within a charitable trust are protected from creditors, ensuring they are used solely for their intended charitable purposes.

According to McCullough, “Charitable trusts provide a structured way to support philanthropic goals while offering tax advantages and ensuring long-term support for chosen causes” (McCullough 93).

5. Special Disability Trusts

Special disability trusts (SDTs) are a unique type of discretionary trust designed to provide for the long-term care and accommodation needs of individuals with severe disabilities. These trusts offer several advantages:

Means Test Exemptions: SDTs can receive concessional treatment under the social security and veterans’ entitlements means tests, allowing beneficiaries to access government benefits.
Tax Concessions: Income and capital gains within the trust are subject to special tax rules, potentially reducing the tax burden on the trust.
Tailored Care: Trustees can make discretionary distributions to meet the specific needs of the disabled beneficiary, ensuring they receive appropriate care and support.
Asset Protection: Assets held within the trust are protected from creditors and other claims, safeguarding the financial future of the disabled beneficiary.

Dal Pont explains, “Special disability trusts are specifically designed to provide financial security and care for individuals with severe disabilities, with significant legal and tax advantages” (Dal Pont 184).

6. Estate Planning

Estate planning is a significant use of discretionary trusts in Australia. Trusts are employed to manage and distribute estate assets in a tax-efficient and controlled manner. Key benefits include:

Avoiding Probate: Assets held in a trust are not subject to probate, allowing for a quicker and more private distribution of the estate.
Tax Planning: Trusts can be structured to minimize estate taxes and optimize the tax position of the beneficiaries.
Control Over Distribution: The settlor can specify how and when beneficiaries receive their inheritance, providing control over the management and use of the estate assets.
Protection of Minor Beneficiaries: Trusts can be used to manage assets on behalf of minor beneficiaries until they reach an age specified in the trust deed.

According to Lang, “Estate planning with discretionary trusts allows for flexible and efficient management of family wealth, ensuring that the settlor’s wishes are respected” (Lang 134).

7. Retirement Planning

Retirement planning often involves the use of discretionary trusts to manage and distribute retirement savings. Trusts provide several advantages for retirees:

Income Distribution: Trusts can be used to distribute retirement income in a tax-efficient manner, ensuring retirees have a steady stream of income.
Asset Protection: Retirement assets held in a trust are protected from creditors and other claims, providing financial security in retirement.
Flexibility: Trustees can make discretionary distributions to meet the changing financial needs of retirees, adapting to healthcare costs, living expenses, and other retirement-related expenses.
Estate Planning: Trusts allow retirees to plan for the orderly transfer of their remaining assets to their heirs, ensuring their wishes are respected.

McCullough notes, “Retirement planning with discretionary trusts provides retirees with flexibility and security, allowing them to manage their financial resources effectively” (McCullough 76).

8. Blended Family Planning

Blended family planning is another area where discretionary trusts are commonly used. In blended families, trusts help ensure that all family members are provided for according to the settlor’s wishes. Key benefits include:

Fair Distribution: Trusts can be used to distribute assets fairly among all family members, including children from previous marriages.
Protection of Interests: Trusts can protect the financial interests of each family member, ensuring that the settlor’s intentions are honored.
Flexibility: Trustees can make discretionary distributions based on the needs and circumstances of each family member, addressing potential conflicts and ensuring equitable treatment.
Estate Planning: Trusts provide a structured approach to managing and distributing assets in blended families, avoiding disputes and ensuring smooth transitions.

Dal Pont states, “Discretionary trusts offer a flexible solution for managing and distributing assets in blended families, ensuring that all members are fairly provided for” (Dal Pont 210).

9. Protection Against Family Law Claims

Protection against family law claims is a significant consideration for many Australians, particularly in the context of divorce or separation. Discretionary trusts offer several protective benefits:

Asset Segregation: Assets held in a discretionary trust are generally not considered part of the marital property in divorce proceedings, protecting them from division.
Trustee Discretion: The trustee’s discretion in distributing assets can provide additional protection against claims, as beneficiaries do not have a fixed entitlement to the trust’s assets.
Family Law Act Considerations: While family courts have broad powers to deal with trust assets, a well-structured discretionary trust can provide significant protection against family law claims.

Lang explains, “Discretionary trusts can be structured to provide significant protection against family law claims, safeguarding family assets in the event of divorce or separation” (Lang 153).

10. Tax Planning

Tax planning is a primary driver for the establishment and use of discretionary trusts in Australia. Key tax planning strategies involving discretionary trusts include:

Income Splitting: Distributing income to beneficiaries in lower tax brackets to reduce the overall tax burden.
Capital Gains Management: Managing the timing of asset sales to optimize capital gains tax (CGT) outcomes.
Tax Deferral: Retaining income within the trust (or rather structures that include the trust) or timing distributions strategically to defer tax liabilities.
Franking Credits: Utilizing franking credits associated with dividend income to offset the trust’s tax liability or pass on to beneficiaries.

McCullough highlights, “Discretionary trusts are a powerful tool for tax planning, offering various strategies to optimize tax outcomes for families and businesses” (McCullough 109).

Conclusion

Discretionary trusts are a versatile and valuable tool for a wide range of purposes in Australia. Their uses range from family and business planning to investment management and charitable giving. Their flexibility, tax efficiency, and asset protection benefits make them an attractive option for individuals and families seeking to manage their wealth effectively too. Understanding the common uses of discretionary trusts can help Australians make informed and well-planned decisions about incorporating these trusts into their financial and estate planning strategies. With proper planning and professional advice, discretionary trusts can provide robust solutions for managing and protecting assets in various contexts. Without the professional advice, they can prove to be a complete disaster. If you are contemplating any of this, contact us first here.

Bibliography

Dal Pont, Gino. Equity and Trusts in Australia. 6th ed., LexisNexis Butterworths, 2015.

Lang, Andrew. Australian Trusts Law: Principles and Applications. 2nd ed., Oxford University Press, 2017.

McCullough, Jane. Australian Family Trusts Handbook. 4th ed., CCH Australia Limited, 2019.