Using a Discretionary Trust to Hold Real Estate: Pros, Cons and Legal Considerations

A discretionary trust is a type of trust where the trustee has discretion over how to distribute the trust's assets to its beneficiaries. This means that the trustee has the power to decide who receives income or capital from the trust and in what amounts.

A discretionary trust can be an effective way to hold real estate, as it provides various benefits such as asset protection, tax benefits, and estate planning.

Asset protection is one of the primary reasons why individuals or businesses may choose to use a discretionary trust to hold real estate. By transferring ownership of the property to the trust, the property is no longer owned by the individual or business, which can help protect it from creditors or legal claims.

In this blog post, we will explore the pros and cons of using a discretionary trust for property ownership, as well as important legal considerations to keep in mind when setting up a trust.

Benefits of using a discretionary trust for property ownership

Following are some of the benefits of using a discretionary trust for property ownership:

Asset protection: By holding real estate in a discretionary trust, the property is legally owned by the trust, rather than by an individual or business. This means that creditors or legal claims against the individual or business are less likely to affect the property held in the trust.
Tax benefits: Discretionary trusts can be taxed at a lower rate than individuals, which can result in significant tax savings. The trustee has the ability to distribute income to beneficiaries in a way that minimises tax liability, and the trust may also be eligible for tax deductions and exemptions.
Estate planning: A discretionary trust can be an effective estate planning tool, as it allows the trust creator to ensure that their property is distributed in accordance with their wishes after their death. By setting up the trust and naming beneficiaries, the creator can help ensure that their property is managed and distributed in a way that reflects their values and goals.
Privacy: By holding real estate in a discretionary trust, the identity of the beneficiaries can be kept private. This can be especially important for high-profile individuals or businesses who may be targeted by creditors or legal claims.
Flexibility: Discretionary trusts offer flexibility in terms of how income and assets are distributed to beneficiaries. The trustee has discretion over how much income or capital to distribute and to whom, which can be useful for managing assets in a way that reflects the needs and goals of the beneficiaries.
Potential for income splitting: By distributing income from the trust to multiple beneficiaries, a discretionary trust can provide opportunities for income splitting. This can be useful for minimising tax liability and maximising the overall benefit to the beneficiaries.

Other benefits of using a discretionary trust for property ownership may include:

Protection from family disputes or challenges to the distribution of assets
Ability to hold and manage multiple properties in the trust
Ability to hold the property for the benefit of minors or individuals who may not be capable of managing their own assets
Potential for greater control over how property is used and maintained

Potential drawbacks or considerations to keep in mind

Costs of establishing and maintaining trust: Setting up a discretionary trust can involve significant legal and accounting fees, and ongoing maintenance costs can also be high. This may make it less feasible for individuals or businesses with limited financial resources.
The complexity of trust administration and compliance requirements: Discretionary trusts can be complex to administer, and there is a range of compliance requirements that must be met to ensure that the trust operates legally and effectively. This can include maintaining proper records, and ensuring that the trustee acts in accordance with their legal obligations.
Potential for conflicts or disputes among beneficiaries or trustees: Discretionary trusts can be vulnerable to conflicts or disputes among beneficiaries or between beneficiaries and the trustee. This can arise from differences in opinion about how income or assets should be distributed, or from disagreements about the management or administration of the trust.
Tax implications, including capital gains tax and stamp duty: While there can be tax benefits to using a discretionary trust to hold real estate, there can also be significant tax implications to consider. For example, capital gains tax may be payable on any increase in the value of the property held in the trust, and stamp duty may also be payable when the property is transferred to the trust.

Other potential drawbacks or considerations to keep in mind may include:

Limited control over the property held in the trust, as the trustee has discretion over how income and assets are distributed
Restrictions on borrowing or accessing credit, as lenders may be hesitant to lend to trusts
Limited flexibility in terms of changing the beneficiaries or trustees of the trust
Potential for the trust to be challenged or contested by beneficiaries or other parties

Click here to read more about “How to Manage a Discretionary Trust: Tips for Trustees and Beneficiaries”

Legal considerations when setting up a discretionary trust for property ownership

Drafting a trust deed that outlines the trust's purpose, powers, and distribution rules: The trust deed is a legal document that sets out the terms and conditions of the discretionary trust, including its purpose, powers, and distribution rules. It is important to ensure that the trust deed is carefully drafted and legally sound, as any errors or omissions could have significant legal consequences.
Complying with relevant laws and regulations, including state and federal tax laws: Discretionary trusts are subject to a range of laws and regulations, including state and federal tax laws. It is important to ensure that the trust is set up and operated in compliance with all relevant legal requirements, including tax registration, reporting, and payment obligations.
Other legal considerations: Other legal considerations when setting up a discretionary trust for property ownership may include succession planning, which involves planning for the transfer of the trust's assets and management to a new trustee or beneficiary in the event of the current trustee's incapacity or death. It is also important to consider potential challenges to the trust's validity, such as claims of undue influence, fraud, or mistake.

How to set up a discretionary trust for property ownership in Australia

Choose a trustee: The trustee is the legal owner of the trust's assets and has the power to manage and distribute them in accordance with the trust deed. The trustee can be an individual or a company, but it is important to choose someone who is trustworthy, reliable, and has the expertise and knowledge to manage the trust effectively.
Draft a trust deed: The trust deed is a legal document that sets out the terms and conditions of the discretionary trust, including its purpose, powers, and distribution rules. It is important to engage a lawyer experienced in trust law to draft the trust deed.
Choose beneficiaries: The beneficiaries of the trust will ultimately receive the income and assets of the trust. The beneficiaries can be individuals or entities, such as companies or other trusts. It is important to consider the tax implications and potential conflicts among beneficiaries when choosing beneficiaries.
Transfer ownership of the property to the trust: The property should be transferred from the individual or entity that currently owns it to the trust. This can be done through a conveyancing process and may involve stamp duty and other costs.
Apply for an ABN and TFN: The trust will need to apply for an Australian Business Number (ABN) and a Tax File Number (TFN) in order to operate and comply with tax obligations.
Comply with legal requirements: The trustee will need to comply with various legal requirements, including reporting and payment of taxes, maintaining proper records, and ensuring compliance with trust law.
Engage a professional: Engage a lawyer or accountant or established firms experienced in trust law to help set up and manage the trust. This will help ensure a successful and compliant trust setup and administration.

Tips for ensuring a successful and compliant trust setup and administration include keeping proper records, seeking professional advice on tax and legal matters, and ensuring compliance with all relevant laws and regulations. It is also important to regularly review and update the trust deed and other trust documents to ensure that they remain up-to-date and legally sound.

If you are considering setting up a discretionary trust for property ownership, Registry Australia can help you with the legal and administrative process. Our expert team can guide you through the steps required to establish a successful and compliant trust, ensuring that you receive the maximum benefits of asset protection, tax advantages, and estate planning.

Contact us today to get started!

Note: The material offered here is for informational purposes only. It does not constitute legally binding advice and should not be a substitute for a consultation with an insurance expert.

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