The Downlow on Discretionary Trusts

Discretionary trusts are very popular in Australia and for good reason. They offer a good way for entrepreneurs, investors, and professionals to protect their assets, financially support current and future family members, and become more tax-efficient.

But setting up and maintaining a discretionary trust can be complicated and requires a lot of administrative work to keep it running smoothly and ensure regulatory compliance.

At PCR Accounting & Advisory, we have helped numerous clients start and run discretionary family trusts focused on meeting specific goals (e.g. asset protection, tax reduction, and intergenerational wealth transfer) and fit into a broader financial plan.

If you’re thinking about opening a discretionary trust, here’s everything you need to know about how they work, their benefits, and the process of setting up one.

What is a Discretionary Trust?

A discretionary trust, or what most Australians refer to simply as a trust, is a legal structure that holds assets for the benefit of specific people (beneficiaries), usually family members. These assets can be property, cash, investments, or valuables like art and jewellery.

In a discretionary trust, the trustees have the power to allocate capital and income to beneficiaries according to their fair judgement. They decide who gets what and when they get it, depending on prevailing circumstances. Hence, why this type of trust is called ‘discretionary’.

This is in contrast to a fixed trust, where beneficiaries have fixed entitlements as outlined in the trust deed, and the trustee has no power to change the distribution.

A discretionary trust consists of several key people.

• Settlor—they create the trust by placing the initial asset, usually a nominal amount of money, into the trust. Their role ends there, and they cannot be a beneficiary of the trust. PCR can facilitate this role.
• Trustee—this is the person or company that manages the trust and decides how distributions are made to beneficiaries.
• Appointor—the person with the ultimate power over the trust. They can appoint and fire trustees and remove or add beneficiaries (depending on the terms of the trust deed).
• Beneficiaries—people or entities who benefit from assets in the trust. They receive income and capital from the trust as decided by the trustee. Beneficiaries are typically family members and can include unborn family members such as grandchildren (which is why discretionary trusts are a good tool for intergenerational wealth transfer).
• Trust Deed—at the centre of a discretionary trust is the trust deed, a document that outlines how the trust is run, including the power and responsibilities of key people, like the appointor and trustee.

Advantages of a Discretionary Trust

1. Flexibility in Income and Capital Distribution

It is impossible to accurately predict the future financial needs of your children and other beneficiaries. By establishing a discretionary family trust, the trustee has the power to adjust how income is distributed to fit changing circumstances.

For example, they can decide to increase the distribution to a particular beneficiary when they start a family or have to pay for their children’s educational needs.

They may also withhold money from a beneficiary if they deem that it is in their best interest. For example, if the beneficiary has a gambling problem.

This flexibility ensures that your money will be utilised in the best way possible to support your family.

2. Asset Protection

When you put your assets in a discretionary trust, you’re no longer the legal owner; the trust owns them. This puts them out of reach of creditors, court judgments, and other legal claims against you.

To provide even stronger protection, we recommend having a corporate trustee – that is, a company as trustee, rather than an individual trustee. . This further reduces the risk of claims being made against the assets of the trust, as well as giving the potential for seamless succession planning.

3. Flexible Tax Planning

Having a discretionary trust gives you access to a number of tax planning strategies that can result in significant tax savings. These include:

• Income distribution to reduce your taxable income. You can distribute income to lower-earning family members through the trust, ensuring you stay in a lower tax bracket.
• Timing distributions to maximise tax efficiency. You can wait until almost the end of the financial year to distribute income to beneficiaries. That gives the trustee time to assess beneficiaries’ income from other sources and decide how best to distribute income to reduce overall tax liability.
• Capital gains from the sale of assets can also be distributed among beneficiaries to lower CGT.

4. Estate Planning

A discretionary trust is great for estate planning and offers several advantages over a will.

The biggest one is that a trust bypasses the probate process since it’s not part of the estate. So there are no delays or legal holdups in distributing income to beneficiaries. Assets in the trust are also safer from family disputes and creditors.

The other advantage is that a trust gives you a lot more control and flexibility over how you pass your wealth to the next generation. New family members can be added as beneficiaries without altering the trust deed and the trustee has the discretion to alter distribution depending on changing circumstances.

Since control of the trust can pass to a new appointor or director of the corporate trustee as necessary, a discretionary trust can keep benefiting your family over multiple generations.

How and When to Set Up a Discretionary Trust

A discretionary trust is most beneficial if:

• You have significant income or expect substantial income in the near future (e.g. from inheritance or capital gain).
• You have or plan to acquire assets like property, shares, or intellectual property. A trust is one of the best ways to protect your assets and ensure they benefit current and future generations.
• You’re in a field where the likelihood of being sued is high, such as law, medicine, or construction. Having your assets in a trust keeps them safer from legal claims.
• You want flexibility in how your wealth and assets help your current and future family members. A trust gives you a lot more control compared to a will.

To set up a trust, consult a professional, like PCR, to help you identify the goals of the trust, key people who will be involved, and how it will be run.

Then pick a name for your trust, choose a trustee, and prepare the trust deed. PCR can help you with the trust deed and all other necessary paperwork and registrations, including ABN and TFN.

You’ll also need to open a bank account to keep trust finances separate from personal finances. You can now start using your trust.

Why Choose PCR When Setting Up a Discretionary Trust?

At PCR, we have decades of experience in succession planning, estate planning, asset protection, and tax-efficient strategies — all areas where discretionary trusts are essential.

We are also able to integrate a discretionary family trust into broader financial planning strategies, such as superannuation.

We can assist you in setting up a trust that meets your specific needs. We also provide ongoing compliance assistance and regular strategic reviews to ensure the trust is running smoothly and is still in line with your financial goals.

Contact us today on 03 9847 7516 to get expert advice and assistance on starting and maintaining a discretionary trust.

Disclaimer: This blog post is for informational purposes only and should not be considered as financial or legal advice. Consult with a qualified professional for personalised guidance based on your specific circumstances.