Discretionary Family Trusts

Discretionary Family Trusts are used strategically in estate planning and investment as a means to facilitate flexibility in managing income tax, capital gains tax and succession planning issues.

A trust is an obligation where a person/entity (trustee) is legally bound to hold and deal with property for the benefit of other people (the beneficiaries). This obligation is usually found in the trust deed, which will also detail the framework for the operation of the trust and record the terms and conditions of the trust. Setting up a  Discretionary Family Trust is created via the execution of a Trust Deed. A Trustee of such a trust can be given specific instructions on how the money is to be distributed or be given discretion.

Generally the Trustee of a Discretionary Family Trust will be a husband and wife of a family unit, or a company which is controlled by the primary beneficiaries, in this case you.

Some Advantages of Discretionary Trusts

  • They allow income and capital to be divided between beneficiaries, at the time and in amounts as determined by the trustee. This makes it possible to reduce tax, as distribution of income or capital can be made in a manner which allows for beneficiaries subject to lower marginal tax rates to receive the bulk of the investment income.
  • The trustee can also take into account the other income of beneficiaries prior to distribution to minimise the amount distributed to beneficiaries.
  • A trustee can direct distributions away from particular beneficiaries.
  • The assets are protected if the beneficiary becomes bankrupt.
  • The assets are protected if the beneficiaries divorce.
  • Trusts can protect assets from being included in the calculation of social security benefits.
  • In the case of death, assets can be guarded from spend thrift beneficiaries.
  • Trusts can be utilised to provide financial support for handicapped children.
  • Trusts allow for the smooth transfer and ongoing ownership of assets within a family unit, from one generation to the next, without the need to trigger capital gains tax on the death of a beneficiary.

Taxation & Trusts

  • It is the duty of the trustee to lodge a tax return for the trust. A trust is not a separate legal entity, therefore it does not pay tax itself.
  • If the trust makes a profit, the trustee or the beneficiary who receives the distribution will pay tax on the income attributable to them. If the trust fails to distribute its income, the trustee is liable for payment of the tax liability of the trust. If the trust distributes its income, the beneficiaries must include that income in their own personal tax returns. The distribution will be taxed at the beneficiary’s marginal tax rate.

Issues When Establishing a Trust

  • A trust is established upon creation of a trust deed. When establishing a trust a number of issues need to be considered.
  • A person must understand the complexity of accounting and legal aspects of trusts; the cost of setting up a trust and administration costs can be significant; and winding up trusts can be a much more complex task than winding up other asset structures.
  • The establishment of a discretionary trust deed calls for the skills of a specialist lawyer. Rules relating to trusts are complex and you will need expert help when dealing with these types of ownership structures. Before such an option is considered, the legal and accounting costs and complexity of establishing a trust arrangement need to be justified.

If you have been considering a family trust or wish to learn more about what options are available to you, please contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected].

The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

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