Discretionary trusts are among the most common types of trust in Australia. In this article, we'll explain what discretionary trusts are, how they work and how they differ from other types of trusts in Australia. We'll also give some examples of when a discretionary trust might be used by an Australian family to protect assets for future generations.
What is a Discretionary Trust
A discretionary trust is essentially a legal entity that protects assets for beneficiaries, who may be unable to manage their own affairs. A trustee has the power to decide what happens with the funds in the trust, whether they are sold, invested, or otherwise disposed of.
A trustee can also determine who receives benefits from the trust and how much those benefits will be worth. For example, if you have a relative who's an alcoholic and can't hold down a job or pay his rent on time, you could set up a discretionary trust so that he can receive enough money each month to cover his expenses but not enough for him to access it all at once. This way, he won't be tempted by alcohol and will have time to get back on his feet before making another attempt at living independently again.
The main purpose of setting up such arrangement is usually tax planning: because trusts don't pay tax themselves but pass earnings through to beneficiaries (who then pay taxes), they're often used as vehicles for reducing income tax liability among other things (see our article 'what are discretionary trusts and how are they taxed' for more information).
How is a Trust Established
Establishing a trust is the first step to ensuring your assets remain protected and distributed according to your wishes. A trust can be created by way of a will, which is an estate planning document that specifies how you want your assets distributed when you pass away, or during life in some circumstances. If you don't have a will, the law will determine how your assets are distributed after death.
Trusts can also be created by deed or a gift during someone's lifetime (a "living" gift). In this circumstance, the settlor or donor transfers all or part of their property into the right of possession of another person (the trustee) who holds and manages it for their benefit for a specific purpose. Thereafter, upon expiration of its term—or if earlier terminated by operation of law—the trustee must distribute any remaining funds according to instructions from whoever established it for there not being any unpaid taxes due on them.
How is a Trust Structured
Discretionary trusts are complex, and it is essential to obtain expert advice when considering setting one up.
Discretionary trusts are not suitable for everyone. They should not be used as a tax avoidance measure or as a way of hiding money from creditors. They may also not be suitable if you want your assets to pass directly to beneficiaries (the people who will inherit your estate). It's important that these beneficiaries are named in the trust deed so that their interests will be considered when making decisions about how the assets in the trust are used or invested.
What are the Rules and Responsibilities for a Trust
As a trustee, you are responsible for making decisions about how the trust is used. This includes managing the trust, investing it and ensuring that it is used for the benefit of beneficiaries.
As a trustee you can choose to invest in any assets that are allowed by law. You can also decide how much money goes into each investment and when this happens. For example, you could decide to put your money into shares or government bonds depending on what you think will give best returns over time.
Trustees also have some powers that other people don't have such as being able to sell property owned by them personally but held in a discretionary trust for any reason including raising more funds for investment purposes (or personal reasons).
How does a Trust Work?
A trustee is responsible for managing the trust assets, making decisions about the trust and paying the beneficiaries. The trustee may be an individual or a company.
The trustee must keep records and tax records as required by law and make sure that they are kept up to date. They must also keep financial records in accordance with accounting standards (known as accounting principles). Trustees who are not accountants can use ready-made software to assist them with their record keeping obligations.
If you have a discretionary family trust that is administered by another party such as a bank or other professional administrator, you may need to sign a declaration confirming that all your income has been reported correctly each year so far. You should ask them if this applies to your situation before signing anything.
Discretionary Trusts in Australia
A trust is a great way to protect your assets and ensure that they are passed on to the right person. They are also a useful tool for managing wealth in an efficient way, which means that many people choose to use them as part of their estate planning. However, it’s important to remember that not all trusts are created equal—there are many kinds of discretionary trusts out there! When discussing this topic with your accountant or financial advisor, make sure they explain what type of trust will work best for you specifically before deciding whether it's worth investing in one.
Contact us today for more information on setting up a discretionary trust or call us on 1300 070 000.
