Asset Protection and Discretionary Trusts (Part One)

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I was recently requested by KMPG on the Sunshine Coast to address their accountants in relation to my thoughts on trusts and asset protection. This is a very good topic and it highlights the importance of giving detailed consideration, and obtaining appropriate advice, before a business or asset ownership structure is established.

In this blog I will talk about what a trust is, the roles in a trust, and benefits of a trust.

What is a discretionary trust?

Generally speaking, a trust involves the legal ownership of the property by one person or entity (the trustee) for the benefit of other parties – the beneficiaries.

In a Discretionary Trust no individual person owns the benefit of the assets as it is up to the trustee to decide who receives income or capital distributions from the trust.

Roles in the trust

There are a number of very important roles in the trust and the people or entities that carry these roles, will have an impact on asset protection strategies.

Settlor – The settlor’s function is to effectively establish or “settle” the trust and give the assets of the trust to the trustee to hold those assets for the benefit of the beneficiaries on the terms set out in the deed.  The settlor will have no further involvement in the trust after executing the trust deed. It is important that the settlor is not a beneficiary or trustee.

Trustee – The trustee holds the legal ownership of the assets of the trust. The trustee is responsible for the assets of the trust, and the trust itself.  The trustee has the powers to manage the assets of the trust and conduct the trust on a day to day basis. Importantly, the trustee can decide who to distribute the income and capital of the trust to.

Beneficiaries – Beneficiaries have the beneficial interest in a trust. They benefit from the trust income and assets if the trustee elects to distribute to a beneficiary.

Appointor – The appointor is the party who has the ultimate control over the trust because the appointor can appoint and remove the trustee. It is this position, along with the trustee, that needs to be considered very carefully when establishing a trust.

Benefits of a Discretionary Trust

There are a number of benefits from establishing a family trust including:

  1. Tax advantages – income from a trust can be distributed to different parties to assist in tax planning;
  2. Asset protection – subject to some limitations, a family trust can protect family assets from the liabilities of one or more family members;
  3. Succession planning – a trust allows family assets to pass to future generations with minimal tax and stamp duty implications; and
  4. Estate planning – a trust can be a useful tool to avoid challenges to a Will.

In my next blog I will discuss the limitations on asset protection for trusts, and discuss some asset protection strategies for trusts.

It is very important to ensure that detailed legal and accounting advice is provided before a structure is finalised. Please do not hesitate to contact me if you have any queries.