Often used for asset protection, tax planning, and wealth distribution, discretionary trusts have proven invaluable for many individuals and can never be undermined.
All you need to do is to learn and understand how it functions and works for the better good.
In this blog post, we give you a better understanding of what it is, how it works, and more for better planning. Let’s dive right into it:
What is a discretionary trust?
A discretionary trust is an arrangement whereby a trustee has full authority to decide how funds will be distributed amongst beneficiaries.
Its primary function is to protect assets and have it evenly distribute to beneficiaries.
Through it comes decision-making and tax-saving flexibility, meant to benefits families and businesses.
In Australia, many businesses have benefited from this trust, by evenly distributing funds amongst beneficiaries and becoming more tax-efficient.
How does a discretionary trust work?
A discretionary trust is established through an agreement between a settlor and a trustee. The settlor transfers assets to the trustee, who then has the discretion to distribute them according to the terms of the trust agreement.
Trust assets are intended for the benefit and use of the beneficiaries as determined by the trustee’s discretion within the terms of the trust agreement established between the settlor and trustee.
It is through a trust deed that a trustee may be granted a broad investment empowerment.
They may get various income-producing assets, businesses, and properties, among other benefits for the beneficiaries.
Key features of a discretionary trust
Here are the key features of a discretionary trust as follows;
1. Trustee control- The trust grants significant discretion to the chosen trustee(s) in managing the trust assets. This includes deciding which beneficiaries receive distributions, when they receive them, and the amount of each distribution.
2. Beneficiaries- The trust deed identifies the individuals or entities that may potentially receive distributions from the trust.
3. Trust deed- This legal document outlines the terms and conditions of the trust. It includes details such as the trust’s purpose, the trustee’s powers and responsibilities, and the potential beneficiaries.
4. Flexibility- It allows the trustee to adapt distributions to the changing needs and circumstances of the beneficiaries, while also considering factors like tax implications and asset protection.
Benefits of a discretionary trust in Australia
A discretionary trust is considered a valuable tool in Australia as it offers many benefits to individuals compared to liabilities.
Here are some of the benefits individuals and companies may get from it as follows;
1. It is tax efficient.
Through a discretionary trust, beneficiaries may get room for tax minimization, minimizing their overall tax burdens.
2. Asset protection
It allows money provided by the settlors to be withheld and stay safe far from creditors of individual nominated beneficiaries.
3. Flexibility
Based on the financial circumstances of beneficiaries, trustees may freely adjust the distributions annually.
4. Estate planning
Ever thought of planning your future? Well, discretionary trust should be in your mind.
It is a very useful tool as it helps maintain control over assets and pass generational wealth.
How to set up a discretionary trust in Australia
The process of setting up a discretionary trust is as follows:
- Draft the trust deed: You need to engage a legal professional to help you develop a trust deed specifically tailored to suit your needs.
- Appoint a trustee: You must select an individual or company to help manage the trust.
- Name beneficiaries: Identify and nominate individuals you want to benefit from the trust.
- Register with ATO: Apply with the ATO to get a Tax File Number (TFN) and an Australian Business Number (ABN) if required.
- Bank accounts and investments: Open a trust account that will help manage the investment under the trust’s name.
Conclusion
A discretionary trust is crucial as it offers many benefits, from taxes to asset protection.
It is always important to consider seeking a lawyer’s advice to help you make the right choices or a qualified accountant offering firms such as KSH TAX. This will help you stay compliant and fully maximize the benefits of the trust structure.
