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Establishing a Discretionary Trust in Australia

 

A lot of cowboys out there. But establishing a discretionary trust in Australia is a strategic process that involves careful planning, legal documentation, and sticking to regulatory requirements. Discretionary trusts are popular for their flexibility. People go nuts over the tax benefits, and asset protection features too. This makes them a favoured structure for estate planning and wealth management. This article provides a summary or guide on the steps involved in setting up a discretionary trust in Australia, covering legal considerations, essential documents, and compliance requirements. Don’t just start setting up trusts once you have read this. Consult a kick ass accountant (like me) first.

1. Getting the Purpose of the Trust right

Before establishing a discretionary trust, it is essential to clearly define the purpose of the trust I.E. what do you want to do with it? Common reasons for setting up a family trust in Australia include:

• Asset Protection: Safeguarding family wealth from creditors or legal claims.
• Tax Planning: Minimizing tax liabilities through strategic income distribution.
• Estate Planning: Ensuring the orderly transfer of assets to future generations.
• Wealth Management: Managing family assets and investments under a structured and flexible arrangement.

Grasping the purpose of the trust helps in making informed decisions about its structure, beneficiaries, and the role of the trustee.

According to Donovan, “The foundation of a successful discretionary trust lies in a clear grasp of its intended purpose, which guides all subsequent decisions and actions” (Donovan 45).

2. Choosing the Right Trustee

The choice of trustee is super important to the effective management of a discretionary trust. The trustee is the one responsible for managing the trust’s assets, making distributions to beneficiaries, and ensuring compliance with legal and tax obligations.

Types of Trustees

• Individual Trustees: Often family members or trusted friends, individual trustees may have a personal interest in the well-being of the beneficiaries. However, they must have the necessary expertise to manage the trust effectively.
• Corporate Trustees: Professional entities that specialize in trust management, corporate trustees offer expertise, impartiality, and continuity. They typically charge fees for their services but provide a higher level of professionalism and experience.

The trustee’s role is governed by fiduciary duties (fancy word for “for someone else”), requiring them to act in the best interests of the beneficiaries (see!), manage the trust’s assets with care, and avoid conflicts of interest.

Heenan notes, “Selecting a trustee with the right mix of expertise, integrity, and impartiality is crucial for the long-term success of a discretionary trust” (Heenan 67).

3. Drafting the Trust Deed

The trust deed is the foundational legal document that establishes the discretionary trust. It outlines the terms, conditions, and rules that govern the trust’s operation, including the powers and duties of the trustee, the rights of the beneficiaries, and the trust’s objectives.

Essential Elements of the Trust Deed

• Identification of Parties: The trust deed must clearly identify the settlor, trustee(s), and beneficiaries.
• Trustee Powers and Duties: The deed should specify the trustee’s powers and responsibilities, including their discretion to distribute income and capital.
• Beneficiary Entitlements: In a discretionary trust, the trustee has the discretion to decide how and when to distribute income and capital to the beneficiaries.
• Trust Objectives: The purpose of the trust should be clearly stated, guiding the trustee’s decisions.
• Amendment and Termination Provisions: The deed should include provisions for amending or terminating the trust, allowing flexibility in response to changing circumstances.

McGregor emphasizes, “A well-drafted trust deed is essential for ensuring that the discretionary trust operates smoothly, complies with legal requirements, and achieves its intended objectives” (McGregor 92).

4. Settling the Trust

The process of settling the trust involves the formal creation of the trust by the settlor. This is done by transferring a nominal amount (usually a small sum of money, just a few bucks) to the trustee, which serves as the initial trust property. The settlor’s role typically ends once the trust is established, and they should not have any further involvement in the trust to avoid conflicts of interest.

 

The Role of the Settlor In A Family Trust

• Initial Transfer of Assets: The settlor transfers the initial trust property to the trustee, which legally establishes the trust.
• Execution of the Trust Deed: The trust deed is executed by the settlor and trustee, formalizing the creation of the trust.

Rowland states, “The act of settling the trust is a formal legal process that brings the discretionary trust into existence, marking the beginning of its operations” (Rowland 54).

5. Funding the Trust

Once the trust is established, it needs to be funded with assets. These assets can include cash, property, investments, or other forms of wealth that the settlor wishes to place under the management of the trustee.

Types of Trust Assets

• Cash and Investments: Liquid assets like cash, stocks, bonds, and other financial instruments are commonly placed in discretionary trusts.
• Real Estate: Property is often transferred into the trust for asset protection and tax planning purposes.
• Business Interests: Shares in family businesses or other business interests can be held in the trust, providing continuity and protection for future generations.

Funding the trust is a super-important step that determines the trust’s ability to achieve its objectives and provide for its beneficiaries.

Sadiq explains, “Properly funding the trust is essential for ensuring that it has the resources necessary to fulfill its purpose and provide for the beneficiaries as intended” (Sadiq 107).

6. Registering the Trust

In Australia, there is no mandatory requirement to register a discretionary trust with a central authority usually. However, trustees must obtain a Tax File Number (TFN) and an Australian Business Number (ABN) for the trust, which are necessary for tax reporting and compliance.

Tax File Number (TFN) and Australian Business Number (ABN)

• TFN: The trust requires a TFN for lodging tax returns and reporting income to the Australian Taxation Office (ATO).
• ABN: If the trust engages in business activities, it must obtain an ABN for GST and other tax purposes.

Trustees are responsible for ensuring that the trust complies with all tax obligations, including registering for GST if the trust’s annual turnover exceeds the threshold.

According to Jacobs, “While discretionary trusts are not required to be registered, obtaining a TFN and ABN is essential for fulfilling tax obligations and ensuring compliance with Australian tax laws” (Jacobs 78).

7. Administering the Trust

The ongoing administration of the trust involves managing the trust’s assets, making distributions to beneficiaries, and ensuring compliance with legal and tax obligations. This requires careful record-keeping, regular reporting, and prudent decision-making by the trustee.

Key Administrative Responsibilities

• Record Keeping: Trustees must maintain accurate records of the trust’s transactions, including income, expenses, and distributions.
• Reporting: Trustees are required to provide beneficiaries with regular reports on the trust’s financial performance and distributions.
• Compliance: Trustees must ensure that the trust complies with all legal and tax obligations, including lodging annual tax returns and paying any taxes owed.

Donovan highlights, “Effective trust administration is crucial for maintaining the integrity of the trust, ensuring compliance with legal requirements, and safeguarding the interests of the beneficiaries” (Donovan 89).

8. Making Distributions

One of the primary responsibilities of the trustee in a discretionary trust is to make distributions to beneficiaries. These distributions can be of income or capital and are made at the trustee’s discretion, based on the terms of the trust deed and the needs of the beneficiaries.

Types of Distributions

• Income Distributions: The trustee can distribute the trust’s income to beneficiaries, who are then responsible for paying tax on the amounts received.
• Capital Distributions: The trustee may also distribute capital to beneficiaries, providing them with access to the trust’s underlying assets.

The trustee must exercise their discretion fairly and in the best interests of the beneficiaries, taking into account their individual circumstances and the objectives of the trust. (Lots of new-ish legislation in this area, likely covered in other articles on our site – be very careful & contact us before doing anything crazy here)

Heenan states, “The discretion exercised by trustees in making distributions is a hallmark of discretionary trusts, allowing for flexible and responsive management of the trust’s assets” (Heenan 103).

9. Amending or Terminating the Trust

Over time, it may become necessary to amend or terminate the trust due to changes in circumstances, legal requirements, or the needs of the beneficiaries. The trust deed should include provisions that allow for amendments or termination, ensuring that the trust remains relevant and effective.

Amending the Trust

The trust deed should specify the conditions under which it can be amended, such as requiring the consent of the trustee, beneficiaries, or a court. Amendments may be necessary to update the trust’s terms, adjust the distribution rules, or respond to changes in the law.

Terminating the Trust

The trust may be terminated upon a specific event, such as the death of the settlor, a set date, or the depletion of the trust’s assets. The trust deed should outline the process for winding up the trust, including the distribution of any remaining assets to the beneficiaries.

According to McGregor, “Amendment and termination provisions are essential for ensuring that the trust can adapt to changing circumstances and continue to fulfill its purpose effectively” (McGregor 134).

So what to think about starting a family trust?

Establishing a discretionary trust in Australia involves a series of well-defined steps. Each of these is super-important to the trust’s success. From understanding the purpose of the trust to choosing the right trustee, drafting the trust deed, and managing the trust’s assets, each stage requires careful planning and attention to detail. Wow. Sounds like a lot? That’s because it is too much for anyone who is not a lawyer or an accountant. By following these steps and ensuring compliance with legal and tax obligations, individuals can create a discretionary trust that effectively manages and protects their assets, provides for their beneficiaries, and achieves their long-term financial goals. Compliance is complex. Legal traps everywhere. Tax pitfalls. Talk to us before doing anything as this entire article is just basic and generic advice – because we don’t know your specifics after all.

Bibliography

Donovan, Richard. Australian Trust Law: A Comprehensive Guide. 2nd ed., Federation Press, 2018.

Heenan, Denis. Trusts and Fiduciary Duties in Australia. LexisNexis Butterworths, 2016.

Jacobs, B., and Battersby, G. Trusts in Modern Practice. 3rd ed., Thomson Reuters, 2019.

McGregor, Helen. Understanding Trust Law in Australia. Oxford University Press, 2015.

Rowland, Peter. Australian Trust Law: A Practical Guide. 3rd ed., LexisNexis Butterworths, 2016.

Sadiq, Kerrie. Australian Taxation Law. 30th ed., CCH Australia Limited, 2020.