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Discretionary Trust: Your Ultimate Guide

16/03/2023 by
The Marketing Team
Are you looking to protect your assets and provide for your loved ones beyond your lifetime? Well, it sounds like a discretionary trust is for you! With its flexibility and customisation options, a discretionary trust allows you to control over how your wealth is distributed, while minimising tax liabilities and ensuring your beneficiaries are taken […]

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Are you looking to protect your assets and provide for your loved ones beyond your lifetime? Well, it sounds like a discretionary trust is for you! With its flexibility and customisation options, a discretionary trust allows you to control over how your wealth is distributed, while minimising tax liabilities and ensuring your beneficiaries are taken care of. In this Business Kitz blog post, we'll explore the ins and outs of discretionary trusts and how they can benefit you and your family.

What is a discretionary trust?

A discretionary trust is a type of trust in which the trustee has discretion over how the trust's income and assets are distributed among the beneficiaries. The trustee is given wide-ranging powers to decide which beneficiaries will receive distributions and how much they will receive. This allows the trustee to adapt to changing circumstances and distribute income in a way that is fair and reasonable. The discretionary trust is often used as an effective tax planning tool, as the trustee can distribute income to beneficiaries with lower tax rates, potentially reducing the overall tax burden on the trust's income. The terms of a discretionary trust are set out in a discretionary trust deed, which outlines the rules and procedures for managing the trust.

It is important to understand the meaning of discretionary trust because it is a powerful tool for managing and protecting assets, both for individuals and organizations. A discretionary trust is a type of trust in which the trustee has the discretion to distribute trust assets to beneficiaries based on their needs and circumstances. This allows the trustee to protect the assets from creditors, lawsuits, and other potential risks, while still providing for the beneficiaries. Understanding how discretionary trusts work, their benefits and limitations, and the legal requirements for establishing and managing them is essential for anyone who wants to use them effectively for wealth management, estate planning, or charitable giving purposes.

When would you use a discretionary trust deed?

A discretionary trust deed is a legal document that sets out the terms and conditions of the trust. Here are some situations when you might use a discretionary trust deed:

  1. Estate planning: Discretionary trusts can be useful for estate planning purposes, particularly for families with complex needs or high net worth individuals. By setting up a discretionary trust, you can ensure that your assets are managed and distributed in accordance with your wishes.
  2. Asset protection: Discretionary trusts can also be used as a means of protecting assets from potential creditors. By transferring assets into a trust, they become the property of the trust, which is a separate legal entity. This means that if you are sued, your assets held in the trust may be protected.
  3. Business succession planning: If you own a business, a discretionary trust can be useful for succession planning. By transferring the ownership of the business into a trust, you can ensure that it is managed and distributed according to your wishes when you pass away.

A discretionary trust is useful for protecting assets and ensuring their efficient distribution. It is typically used by individuals with significant wealth, business owners, and those with complex family situations. It can also be used to minimise taxes and provide for future generations, making it a popular estate planning tool.

What does the discretionary trust deed cover?

The contents of a discretionary trust deed can vary depending on the specific circumstances of the trust and the preferences of the settlor (the person who creates the trust). However, some common provisions that may be included in a discretionary trust deed are:

  1. Trust Purpose: The purpose of the trust is to benefit one or more beneficiaries. This section outlines the purpose and intent of the trust.
  2. Trust Property: This section outlines the assets that will be held in the trust.
  3. Trustees: This section outlines the number and identity of the trustees responsible for managing the trust.
  4. Beneficiaries: This section outlines the identity of the beneficiaries who may benefit from the trust.
  5. Discretionary Powers: This section outlines the powers and discretions of the trustees, including the power to make distributions of income and capital to the beneficiaries.
  6. Distribution of Income and Capital: This section outlines the procedures for distributing income and capital to the beneficiaries.
  7. Termination: This section outlines the circumstances under which the trust may be terminated.
  8. Variation of the Trust: This section outlines the procedures for varying the terms of the trust.

What is the difference between a discretionary trust and a family trust?

A family trust is a type of trust that is established for the benefit of family members, often used for estate planning purposes. The beneficiaries of a family trust are typically predetermined and fixed, such as children, grandchildren, or other close relatives. The trust is managed by a trustee who is responsible for making distributions to the beneficiaries according to the terms of the trust.

On the other hand, a discretionary trust is a type of trust where the trustee has the discretion to decide which beneficiaries receive distributions and how much they receive. The beneficiaries of a discretionary trust are not predetermined and fixed, and the trustee has the flexibility to make distributions based on individual needs, circumstances, and merit. This type of trust is often used for asset protection and tax planning purposes.

The main difference between a family trust and a discretionary trust is the fixed beneficiaries of the former versus the flexible beneficiaries of the latter, and the trustee's responsibility to make distributions according to the terms of the trust versus having discretionary power over distributions.

What is the difference between a discretionary trust and a testamentary trust?

A testamentary trust is a trust that is established through a person's will and comes into effect upon their death. It is used to distribute assets and manage them for beneficiaries according to the deceased's wishes.

A discretionary trust, on the other hand, is established during the lifetime of the settlor and is managed by a trustee who has discretion over how to distribute the assets to beneficiaries. The trustee can make decisions based on the needs and circumstances of the beneficiaries, as well as any instructions given by the settlor.

Legal Advice

It is imperative that you consult with a qualified professional to ensure that this deed is appropriate for your specific situation before utilising it. Check out Business Kitz subscription service today to access our full range of legal, commercial and employment documents to begin your business with a solid foundation that ensures compliance. If you are unsure about this deed and require assistance, our sister company, Legal Kitz can assist you. To request a FREE consultation with one of their highly experienced solicitors, click here today, or contact us at info@legalkitz.com.au or 1300 988 954.

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The Marketing Team
Business Kitz Marketing team are experts in their field. You can expect the best business guides and updates on employment law here.

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