What are Discretionary Trusts?
A Trust is an obligation imposed on a person or other entity to hold property for the benefit of the beneficiaries. A Trust is split between two parties. A “trustee” – the person who manages the Trust on behalf of the beneficiaries. The “beneficiary” – the people who own the property/assets.
Discretionary trusts are when the trustee chooses which beneficiaries receive the trust property, and how much of the trust property they get. The discretion is in the trustee having the option of splitting up the trust property however they like. There are no limits in a trustee’s discretion when allocating shares, as there is complete freedom in a discretionary trust.
Advantages of a Discretionary Trust:
A discretionary trust can be beneficial for asset protection and tax purposes. Some potential benefits of this structure include:
Estate planning for the benefit of members of the “family group” in the event of an unexpected death
Trust property is exempt from creditors. A creditor cannot take trust property in bankruptcy or liquidation (unless the debt was originally a trust debt)
Tax minimisation, as individuals can receive a 50% Capital Gains Tax exemption under a trust
Flexible and easy distribution of trust income and capital
Disadvantages of a Discretionary Trust:
Complexity in establishing and maintaining a trust structure
Only profits (not losses) are distributed
Vesting date: in NSW, trusts generally end after no more than 80 years; extending this date requires foresight in drafting the trust, otherwise, you may face costly court action
Investors are more likely to invest in a company structure rather than a trust structure
Lawpath has a discretionary trust document on the platform that you can access and create
As establishing a discretionary trust is quite a complex and daunting task, it is highly recommended to have a lawyer review any documentation that is created to ensure the legal validity and that it is set up specifically for your circumstances. Find your perfect lawyer here!