A discretionary trust is a legal agreement between different parties in which the trustee is given the power/discretion to decide which of the beneficiaries are to benefit from the trust. A discretionary trust can help protect family assets and enable income and capital to be spread among members of a family.
After executing the trust deed a discretionary trust is usually established by a small gift (e.g. $10) made by a person who is unrelated to the beneficiaries of the trust, who is called the settlor. After the initial settlement by the settlor, most of the trust property (i.e. trust fund) usually comes from gifts or loans made by the person who wished to establish the trust (who is generally also a beneficiary of the trust) (the 'principal').
A trust continues after it is established for such period as specified in the trust deed up to a maximum period specified by law (usually 80 years), unless the trust assets are distributed earlier to the beneficiaries and the trust is terminated (or wound up). The trust fund is held by the trustee and administered in accordance with the terms of a trust deed.
Although the principal may have provided most of the assets of the trust and he or she may control the trustee and therefore the trust, those assets are trust assets. Once they become trust assets they cease to be assets of the principal and cannot be dealt with in the principal's Will, however the principal may prepare a Memorandum of Wishes giving direction to the trustee of the trust as to how the principal wishes for the trust to be administered and trust assets dealt with after the principal's death.
The appointor may in his or her Will nominate the person who is to succeed them as appointor upon death upon death or incapacity.
The trustee has the power to distribute and/or accumulate the income and capital of the trust to the beneficiaries. In each financial year, the trustee determines which beneficiaries (if any) will receive distributions of income and/or capital from the trust, and in what proportions. Until such time as the trustee has exercised its discretion in favour of a beneficiary, the beneficiary has no entitlement at law or in equity to any distribution. However, the beneficiaries have a right to require the trustee to administer the trust in accordance with the provisions of the trust deed.
The tax, stamp duty and estate planning implications for the beneficiaries of the trust structure and decisions of the trustee need to be carefully considered and the principal and/or trustee may wish to seek accounting, tax and legal advice on these matters.
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