Discretionary trusts (Family trusts)

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A discretionary trust, often called a family trust is a vehicle which allows you to hold assets without being the actual owner.

The beneficiaries of the trust do not have a fixed entitlement to property that is accumulated in the trust.

The property in the trust can range from a family business to securities, cash and property.

What are the four parties in discretionary trusts?

There are four important parties to a trust, they are the:

  • Settlor
  • Trustee
  • Appointor
  • Beneficiaries

The Settlor

The settlor is the person responsible for setting up the trust, naming the beneficiaries and the appointor.

From a tax perspective, the settlor should not be a beneficiary under the trust.

The Trustee

The trustee is the legal owner of the trust property but is not the beneficial owner.

It can be a natural person or a corporate entity.

The trustee administers the trust for the benefit of the beneficiaries and must always act in the best interests of the beneficiaries.

It is important that a trustee at all times obeys the terms of the trust deed.

The trustee must sign all documents for and on behalf of the trust.

The Appointer

The Appointor or protector, guardian or principal is the person named in the trust deed who has the ultimate control to remove and appoint trustees.

An appointor can be a beneficiary, an existing trustee or a third party such as a professional (lawyer or accountant).

The have a very important role when a trustee dies, becomes bankrupt or is incapacitated; or in the case of a corporate trustee when it is wound up.

The Beneficiaries

The beneficiaries are the people and can include entities for whom the trustee holds the trust property for.

In the case of a discretionary trust you will find there is usually a very wide range of beneficiaries, often including companies and other trusts.

It is important to keep in mind that the beneficiaries of a discretionary trust do not have an interest in the assets of the trust, rather a right to be considered or a mere expectancy until such time as the trustee exercises its discretion to make a distribution.

Often trust deeds use different terminology, but in the trust deed it will define the different types of beneficiaries.

Generally ‘primary beneficiaries’ define a particular individual, that individual’s spouse, their children and their descendants.

General or secondary beneficiaries’ can include relatives of the primary beneficiaries, such as siblings, spouses, widows, cousins, nieces and nephews. They can also include charities, companies controlled by one or more of the primary and/or general beneficiaries, and trusts of which one or more of the primary and/or general beneficiaries is a trustee, director of a trustee company, or a beneficiary.

Why set up a discretionary trust?

There are a range of benefits and it is important to get expert advice when setting up such a structure, but they include:

  • Asset protection
  • Estate and succession planning
  • Taxation management and benefits

.There are also disadvantages such as:

  • Cost of set up and administration
  • Limitation in relation to business ownership when it comes to investment etc
  • Liability for the trustee

How do you set up a discretionary trust?

Before you contemplate setting up a discretionary trust contact our team at FC Lawyers to discuss your needs.

We have an experienced team in the business and corporate sector and the wills and estate planning area who will discuss the type of trust and its objectives to you in simple and easy to understand terms.

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