Estate planning can include more than just your will depending on your assets. Sometimes, they can consist of trusts that are subject to specific terms. In this guide, we discuss discretionary trust in Australia and whether or not you should choose to include one in your estate.
What is a Discretionary Trust?
A discretionary trust is a legal agreement that gives trustees the power to decide which beneficiaries will benefit from the trust, how much they get and when. All capital and income are distributed and divided at their discretion.
Benefits of a Discretionary Trust
There are several benefits of a discretionary trust that make them worth having in addition to your Will. Of course, you can also have this in addition to a Testamentary trust which makes up part of your Will. However, a discretionary trust operates while you’re alive.
Here are some of the top benefits why you should have a discretionary trust:
- Allow for assets to accumulate for beneficiaries. Discretionary trusts allow assets to accumulate for the current and future beneficiaries. The trustee legally owns these assets, which means they can avoid incurring significant taxation consequences.
- Flexible for changing estates and growing families. In addition to accumulating assets, discretionary trusts offer flexible distribution of income and capital. The trustee can change where the funds go and don’t need to specify who the beneficiaries are when creating the trust.
- Lower capital gains tax. Discretionary trusts offer several tax benefits. When you operate a business as a discretionary trust, it’s entitled to a discount on capital gains made by selling assets held for longer than 12 months.
- Lower tax liability. Discretionary Trusts can help lower tax liability in families where the trustee earns the majority of the income. Trustees can reduce their tax rate by redistributing their income.
- Dynamic retirement savings. Unlike superannuation funds, discretionary trusts limit what the trustee can contribute. Trustees can also withdraw from the trust at any time.
4 Steps to Set Up a Discretionary Trust
Depending on your circumstances, it’s best to speak with a legal professional to determine if a discretionary trust is a good option for you, your family or your business. However, if you decide to go ahead, here are four steps you can expect during the discretionary trust setup.
- Determine what assets will go in the trust. Before setting up a discretionary trust, it’s crucial to determine what assets you plan to include in the trust. This planning is critical if you’re using it as a business structure.
- Select a Trustee. After determining what assets will go in the trust, you need to appoint a trustee. A trustee for a discretionary trust can be an individual, a company controlled by the family or a third-party trust management company.
- Draft a Discretionary Trust Deed. The most crucial step is drafting the discretionary trust deed. The deed should be prepared with the help of a legal professional and includes details on the objectives, assets and beneficiaries of the trust.
- Complete the required paperwork. Finally, you’ll need to sign and date the trust, apply for an ABN and TFN and open a bank account in the trustee’s name. Once the bank account is open, someone not a beneficiary needs to deposit a settlement sum to make it operational.
Choosing a discretionary trust in Australia for your assets is a great way to protect your assets and distribute them to your family evenly. As the appointor of the trust, you have the power to add, withdraw and distribute all possessions in the trust.
Estate planning starts here– start writing your Will online, so you and your loved ones are protected.