The Importance of Setting Financial Goals: Achieve More with SMART Goals
Learn how to set clear and achievable financial goals using the SMART method. Start planning for your financial future today with Poole Advisory.
What’s a discretionary trust?
Let’s back up a bit and start with the easier question: what’s a trust? It is “a legal relationship whereby one party (the trustee) holds something (usually money, land and/or shares) for the benefit of another (the beneficiary/ies). (Source: Australian Shareholders’ Association)
In Australia, the terms ‘discretionary trust’ and ‘family trust’ are pretty much interchangeable, with the extra proviso that a family trust can distribute only to family members.
Owners of discretionary trusts have the right or ability to determine the control and allocation of the trust’s assets and income, for the benefit of its beneficiaries.
The trustee of a discretionary trust is commonly a private, family-controlled company. They might also conduct family businesses, hold equity interests in private enterprises and conduct private investment portfolios.
So in short: discretionary trusts involve trustees being granted complete discretion about how the trust income is distributed among beneficiaries.
Despite not directly managing the trust, beneficiaries get their share of the income generated from the trust’s assets.
Many reasons account for discretionary trust set-ups in Australia, including:
While many families and businesses continue to enjoy the benefits of well-drafted discretionary trusts, they do have their drawbacks.
If you’re thinking of setting up a discretionary trust, learning about its benefits and drawbacks from certified financial advisers will help you make a more informed decision.
Besides using insurance covers to protect your wealth, a discretionary trust helps to keep creditors away from your properties and investments.
Any property or asset under a discretionary trust is held in trust for the current or future benefit of the beneficiaries.
The assets do not belong to the settlor, trustee, or beneficiaries; they’re only held by the trust legally.
This adds a layer of protection to the trust, since creditors can’t claim the assets as personal property in the event of bankruptcy, except when the claim relates to the trust’s debt.
Similarly, any property held by a company as the trustee for a trust cannot be acquired by the creditors in case of the company’s liquidation, unless the debt belongs to the trust.
Making decisions about distributing funds amongst loved ones can be challenging. But a discretionary trust helps reduce conflicts by distributing the assets and income.
It also lets settlors step back from deciding which assets and properties should be allocated to each beneficiary. Instead, the responsibility is handed to the trustee.
This saves time and effort, especially if the settlor owns a huge estate or several asset classes.
Related article: Exploring different asset classes and the level of risks they have
While it is ultimately up to the trustee’s discretion, settlors still provide guidelines on how assets should be distributed to beneficiaries.
For instance, the settlor can list the names of the primary beneficiaries and nominate unnamed ones. This may include extended family members or future children.
The trustee would then decide how the investments would serve the interest of the listed beneficiaries. This way, wealth is distributed more precisely to loved ones if the settlor passes on.
Setting up a discretionary trust gives Australians more control over how their estate devolves after passing on.
Planning well and in advance means that surviving loved ones are catered for, even in the event of an unexpected death.
A discretionary trust’s versatility makes it possible to include family members who are not yet born as beneficiaries. This allows you to leave assets to your children and potential grandchildren.
The ownership of a trust’s assets cannot be transferred through a settlor’s will; the law no longer recognises the settlor as the legal owner.
The trustee can discreetly make payments of the trust’s capital and income to the beneficiaries if they declare a testamentary discretionary trust in the will.
This is one of the strengths a discretionary trust has in protecting the beneficiaries’ inherited assets.
When a beneficiary inherits assets in their name, the assets are liable for claims in case of bankruptcy. But in a testamentary discretionary trust, their inheritance is protected.
Likewise, the beneficiary’s inherited assets are protected during divorce or separation. An ex-partner cannot receive part of the income or assets.
Expert tip: Working with a certified estate planning lawyer is crucial for wealth protection. They’ll help you create an effective estate plan that precisely outlines how you want your estate distributed after death. This, in turn, prevents family disputes and unnecessary costs.
Now, let’s look at some of the drawbacks of a discretionary trust…
Like other trusts, setting up a discretionary trust can be complicated.
The complexity depends on:
Working with an established, well-experienced trustee eases the pressure of creating a trust. They’ll also ensure that the trust runs smoothly even after handing over control of your assets.
Usually, if one of your assets experiences losses, the Australian Taxation Office (ATO) will allow you to offset the loss with one of your other incomes or investments. This could be your salary or profits from your investment bonds.
However, this does not apply to assets held within a discretionary trust. So if one of your assets runs at a loss, you can’t use it to offset a beneficiary’s taxable income.
Instead, the asset remains in the trust until it accumulates enough income to cover the loss. This way, only profits are distributed to beneficiaries, not losses.
Despite its few drawbacks, a discretionary trust is an effective estate planning tool.
When drafted carefully, it helps to reduce family conflicts and avoid mismanagement of assets.
Since family needs change with time, a discretionary trust allows you to modify trust provisions and beneficiaries.
This ensures that your assets are protected, and your intended recipients are catered for after your death.
A discretionary trust’s flexibility allows you to add other assets to the trust during your lifetime. This results in more wealth protection and accumulation.
Thus, it will lessen the legal burden left for the surviving family members and minimise unnecessary costs.
Below are the key participants that make up a discretionary trust.
Key player | Participatory role |
Settlor |
|
Trustee |
|
Appointor |
|
Beneficiaries |
|
It’s within a trustee’s legal authority to determine the proportion of the benefit that every beneficiary receives.
This is a huge responsibility that becomes even more complex when trustees also become beneficiaries.
That’s why it’s crucial to choose a trustee with the experience, capability and maturity to handle such a role. They must also have the beneficiaries’ best interests at heart.
Professional and experienced financial advisers are often suitable to serve as trustees because they understand your financial needs and know your assets almost as well as you do.
Financial advisers are in a position to assess their clients’ financial needs and advise them on tax laws, investments and successful retirement plans – that means financial planners understand their clients’ assets extremely well.
This makes them suitable to serve as trustees to protect your assets and ensure your intended recipients receive their rightful share.
Poole Advisory has a team of certified financial advisers with many years of experience in the estate planning industry.
We work closely with estate planning lawyers to ensure your estate and investments are protected. Together, we’ll help you create discretionary trust wills that will secure your loved ones’ futures.
So reach out today or book an introductory meeting with Anthony Poole to get started. We’d be more than happy to hear from you.
“Where we felt like overlooked numbers before, with Anthony, we feel valued and seen.” – Quinn C, Client
This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns
Poole Advisory Pty Ltd ABN 15 642 040 604 is a Corporate Authorised Representative (No. 001282603) of Prosperitas Partners Pty Ltd ABN 30 662 654 453 AFSL 544 917
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