Business Law

Discretionary Trusts & Family Trusts

Discretionary Trusts, Family Trusts or Family Discretionary Trusts are probably the most widely used type of trust structure. 

They are commonly referred to as Family Trusts because they are typically used to distribute income amongst family members. One of the biggest benefits of a family trust allows the flexibility for the trustee to decide how much each beneficiary will receive distribution. The distribution does not need to be in any particular proportion, and does not need to be the same as the previous year. This means that you can take into account tax consequences for each beneficiary and distribute income to your family in the most tax efficient way.

For example, the Trust Deed may state that all of John Smiths’ children are entitled to distribution, however out of his three daughters, who will receive how much will be entirely up to the Trustee.

The pool of eligible people that will fit in the category however cannot be altered, so usually the class of beneficiaries are defined as wide as possible, unless there is a particular family member you wish to exclude. Our commercial lawyers will be able to assist you in structuring your Family Trust correctly.

Benefits and advantages of establishing a family trust includes:

  • Asset protection (bankruptcy); assets held in trust cannot be taken by a creditor if the trustee becomes bankrupt or insolvent as the trustee is not holding the assets for his/her own benefit, but for the beneficiaries (even if the trustee is also one of the beneficiaries). Equally as a beneficiary the “interest” the beneficiary holds cannot be taken by the creditors if a beneficiary becomes bankrupt.

  • Asset protection (divorce): a beneficiary’s interest is usually not divisible on the breakdown of a marriage or de facto relationship. However if the trust is seen as an “alter ego” of a party it may be divisible. It may also be taken into account as a “financial resource”.

  • Fairly straight forward to establish, with lower costs than other asset protection structures such as self managed super funds.

  • Tax benefits; there are potentials to minimise income tax and to avoid capital gains tax. 

  • Estate Planning; The ownership of the assets do not change even if you pass away; it will continue to be held by a trustee

Disadvantages of a family trust include:

  • Depending on your circumstances the costs of setting up and maintaining a family trust may not be worthwhile.

  • The trustee must act in accordance with the trust deed. Even if you are the trustee, you will not be able to deal with the assets in whatever manner you would like; you must act for the benefits of the beneficiaries. In this respect you may find it that you have lost some control over “your” assets.

  • You may find the legal structure complex especially if you decide to use a company as a trustee. Our commercial lawyers will be able to explain to you in simple terms the structure of your trust.

  • The beneficiaries do not have the power to enforce distribution unless the trustee’s discretion is exercised.

If you require assistance with trusts, or are thinking of setting one up please get in touch with your nearest Prime Lawyers office.

We have business lawyers located at Sydney, Parramatta, Chatswood, Sutherland and Wollongong.    

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