Discretionary trust set up: A smart strategy for financial planning

Introduction:

If you've ever felt like you're over your head trying to figure out how exactly to set up a discretionary trust, don't despair! This blog's aim is to guide you through the step-by-step process and provide all the helpful resources necessary for setting up one of these often misunderstood yet incredibly useful legal structures.

We'll cover the purpose of setting up this trust, its benefits, drawbacks, and the various considerations each party needs to bear in mind when making their decisions.

As difficult as it may seem now, setting up a business in a discretionary trust structure doesn't have to be an intimidating experience, as long as you know what questions need answering (and where) along the way.

So, let's dive into the details and get started.

What is a discretionary trust?

A discretionary trust in Australia is an arrangement where a trustee holds the property on behalf of a group of people known as beneficiaries. This flexible and powerful legal relationship allows trustees to make distributions at their discretion and gives the participants considerable taxation flexibility.

The assets of a trust are generally not subject to income tax, meaning that prospective trust members can retain more control over their respective finances than they would if they simply invested in traditional methods.

Furthermore, discretionary trusts can be used for estate planning, creating meaningful legacies that one's family and friends may invest in even after the original beneficiaries have passed away.

This type of trust is commonly deployed by families who wish to protect their financial security for generations to come.

Components of discretionary trust

The different components include:

• Trustee:

  A trustee is an individual who will manage the trust and make all important decisions on behalf of the beneficiaries. The trustee, in most cases, is commonly a company (a corporate trustee) or a family member. The trustee decides on any amount (if any) to distribute to any of the beneficiaries.

• Beneficiaries:

  Beneficiaries are those who receive the benefits of the trust, such as distributions of money or assets. They will be identified in the trust deed and typically have no control over managing the trust.

• Trust deed:

  The Trust Deed is a document that outlines the rules that must be followed by both the trustee and the beneficiaries. This includes information such as how assets can be distributed, how decisions are made, and other important details about administering the trust.

• The settlor:

  The settlor is the person who originally sets up the trust and creates the Trust Deed. The settlors are responsible for signing the trust deed and giving the trustee an initial settlement sum.

• Assets:

  Assets are the items that are owned by the trust. These trust assets can include money, investments, real estate, and other tangible items.

• Discretionary power:

  Discretionary power is the right of the trustee to make decisions on behalf of the beneficiaries as defined in the Trust Deed.

• Taxation

  Discretionary trusts, which are a trust run by appointed trustees for the benefit of potential beneficiaries, are subject to taxation.

  The trust must lodge an annual trust tax return with the relevant revenue authority, and income earned by the trust will be taxed at the trustees' highest marginal tax rate.

What is the purpose of setting up a discretionary trust?

A discretionary trust is a legal entity set up to protect and manage assets on behalf of an individual or family.

Discretionary trusts are often used to store wealth, provide beneficiaries with tax advantages, and protect them during times of financial difficulty.

To illustrate this advantage, let's consider two scenarios

These scenarios demonstrate that this discretionary family trust offers numerous ways to safeguard family wealth and maintain financial security for its intended beneficiaries in an ever-changing world.

What are the benefits of setting up a discretionary trust in Australia?

The main benefits of setting up a discretionary trust in Australia are:

• Tax planning:

  By setting up a discretionary trust, individuals and families can benefit from more efficient tax planning and greater control over their finances.

  Discretionary trusts offer many tax benefits, including lower income tax rates, reduced capital gains tax, and the ability to defer or split taxable income.

• Asset protection:

  A discretionary trust is an important vehicle to help protect family assets from creditors and enable income and capital to be spread among members of a family in order to reduce the family group's tax bill.

• Flexibility:

  Discretionary trusts can be customized according to one’s needs, allowing beneficiaries to have greater control over the trust’s funds and how they are used.

• Estate planning:

  Discretionary trusts can also be used for estate planning as they allow individuals to pass on their wealth to future generations more efficiently and efficiently. This ensures that one's wishes for their family will be respected.

• Carry-forward losses:

  Discretionary trusts can also carry forward losses, allowing individuals and families to benefit from reduced income tax rates. This is useful for those who have invested in higher-risk investments but cannot claim a tax loss until the trust has had sufficient profits.

• Capital gains tax discount:

  Setting up a discretionary trust in Australia also entitles the beneficiary to receive discounts on capital gains tax when selling assets held in the trust.

  This means that any profits made from these assets can be distributed among family members at a lower rate of taxation. This eventually minimizes tax obligations for beneficiaries.

What are the drawbacks of setting up a discretionary trust in Australia

The main drawbacks of setting up a discretionary trust in Australia are:

• Complexity:

  Discretionary trusts can be complex, as they involve numerous legal requirements and conditions. This means that individuals looking to establish trust should seek professional advice from lawyers or accountants.

• Family trusts distribution tax:

  Trusts may be subject to a family trust distribution tax. This is a tax imposed on distributions made by the trustee to certain beneficiaries, which can reduce their overall return from the trust.

• Cost:

  Setting up a trust can be expensive, as there are legal fees and ongoing costs associated with maintaining it. These costs must be weighed against the potential benefits of setting up the trust to determine if it is worth pursuing.

• Lack of control:

  Once a trust is set up, the trustee retains full control over the trust’s assets. This means that beneficiaries have no say in managing or investing their funds, which can be an issue for those who wish to have more involvement in decision-making..

• Restrictions on distributions:

  Discretionary trusts also restrict distributions, meaning the trustee cannot distribute to beneficiaries at will. This can be an issue for those relying on a regular income from their trust or needing access to funds in case of an emergency.

How to set up discretionary trust in Australia?

The process of a discretionary family trust set up in Australia is relatively straightforward and can be done by following a few simple steps discussed below.

Step 1: Choose a trustee

• Choosing a trustee for your discretionary trust is the first step to setting up a trust structure that meets the requirements of ASIC legislation. The chosen individual or company must be registered with ASIC and over 18 years to ensure legal compliance and fiduciary duty.

  It's important to remember that this selection will be highly influential on how the trust is managed, and ensuring that they can carry out their duties should be considered a priority.

  With the right selection, you can be confident that the trust affairs and any associated decision-making will all meet statutory requirements.

Step 2: Draft a discretionary trust deed

• The second important step to establishing a valid and reliable structure in Australia is drafting a deed.

  Depending on the specific needs of the trust, many considerations should be considered when drafting a trust deed to ensure it is enforceable.

  Drafting must include key information such as trustees, beneficiaries, roles and responsibilities, assets and liabilities, and periodic profits or losses.

  All relevant parties must further sign a trust deed to be enforceable under Australian law. Once finalized, stamp duty registration with the relevant revenue authority is required to settle the trust officially. Without this crucial step, your trust may not hold up in court.

Step 3: Pay stamp duty

• Paying stamp duty is critical for establishing a discretionary trust in Australia. It is highly recommended that you seek advice from legal and financial professionals to ensure that you understand the implications of paying stamp duty on your trust deeds.

  Paying the required stamp duty taxes should be done after all the other steps have been taken to set up the trust, as the payment will help ensure that all applicable laws relating to setting up a trust apply to your situation.

Step 4: Apply for an ABN or TFN

• To set up a discretionary trust in Australia, you must apply for an ABN (Australian Business Number) or TFN (Tax File Number). This number is unique and allows the trust to pay taxes, be invoiced, or conduct business activities. Additionally, the trustee may need this number for various administrative purposes, such as making investments or dealing with banks.

  Obtaining an ABN or TFN should be done before setting up the trust, and it can be done online through the Australian Business Register or with the assistance of an accountant. After obtaining the proper documents, you will have access to the necessary information on setting up your discretionary trust.

Step 5: Open bank account

• Once the trust has been established, and the trust deed stamped, the last step in setting up a discretionary trust in Australia is to open a bank account.

  This will be the main financial hub for income generated from the trust and expenses paid out of the trust's account. It is important to find an appropriate financial institution and account type that meets the requirements for your purpose.

  Depending on the details of the trust, such as its legal structure, some financial institutions may not provide services for certain beliefs and require more information or validation of trust documents before allowing an account setup process to begin.

  Once all necessary documents have been completed and filed, accounts can be opened, and funds can be transferred to establish this trust in Australia.

Conclusion

So, it's no secret that a discretionary trust is a common Australian estate planning tool. Setting up a discretionary trust in Australia provides numerous benefits and can come with little risk from the government or the trustee.

As long as due diligence is taken to fully understand what a discretionary trust entails and expert advice is sought when drafting the defining document, clients shouldn't have any unexpected bumps in the road.

While this article serves as general information about discretionary trusts and setting one up here in Australia, CleanSlate is dedicated to helping businesses and individuals alike set up their tailor-fit well-secured trust and desired business structure that best suits their needs.

If you're still tossing around whether or not you should dive into establishing your Discretionary Trust - take the plunge! Don't sleep on diligence when it comes to financial matters; contact CleanSlate today and ensure your financial future is secured tomorrow.