31 March 2024

Protecting assets and preserving wealth through Discretionary Trusts

Matthews Folbigg Lawyers


Matthews Folbigg Lawyers is located at Parramatta in the geographic heart of Sydney. We serve all of the legal needs of individuals, government and businesses, regardless of their complexity, throughout all of Sydney and beyond. We are industry leaders, and we never lose sight of the outcome that you want. We guide you through the legal process to achieve that outcome. Our growth and our success, comes from the growth and success of our clients. If you look to us for help, you will notice the difference. We can make a difference today, whatever your requirements.
A Discretionary Trust can be a tax-effective structure to build wealth for future generations.
Australia Corporate/Commercial Law
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What is a Trust?

A Trust is formed when a person or entity (the Trustee) holds assets for the benefit of another person or class of persons or entities (the Beneficiaries). Strict legal and fiduciary obligations are imposed upon the Trustee in order to protect the Beneficiaries' interest in the trust assets. Under these obligations, a Trustee must act: 

  1. in good faith, honestly and not profit from the Trust (as Trustee); 
  2. with due care, skill and diligence and avoid conflicts of interest; 
  3. in the best interests of the Beneficiaries; 
  4. to preserve the Trust property; 
  5. in person and not delegate their duty to another person; and 
  6. transparently and account and provide information to the Beneficiaries, upon request.  

The Trustee's failure to comply with its fiduciary obligations can result in the Beneficiaries commencing legal proceedings against the Trustee in respect of such breach.   

Additionally, the Trustee also assumes legal responsibility for the operation, management, and liabilities of the Trust as a Trust is not a legal entity. The Trustee would normally have a right of indemnity under the trust deed. 

Discretionary Trusts

While there are various types of trusts, a Discretionary Trust is prevalent among families, family-run business or small businesses for its tax, wealth accumulation and asset protection benefits. 

The Trustee of a Discretionary Trust may, in its discretion, allot Trust assets and/or income to certain Beneficiaries as the Trustee considers appropriate. This allows the Trustee to distribute income for tax efficiency and protect trust assets from creditors of bankrupt or insolvent Beneficiaries.

Further, Discretionary Trusts may also prescribe a 'vesting date', being the date on which the Trust ends and Trust assets are distributed to the Beneficiaries. In New South Wales, a private trust can last for up to 80 years. Where the vesting date is well into the future, Trust assets and wealth can be built up over many decades before being distributed to Beneficiaries. 

Key Considerations

There are potential drawbacks to Discretionary Trusts, which should be carefully considered to determine the appropriateness of a Discretionary Trust to your family or business needs. 

It is prudent to obtain taxation advice prior to establishing a Discretionary Trust as there are costs, expenses and tax and stamp duty implications associated with establishing and managing Discretionary Trusts, including if you intend to transfer real property from yourself to the Trust. Additionally, bookkeeping and reporting obligations require timely management and administration of the Trust's affairs by the Trustee, which can also be costly and time-consuming. 

In the case of a Discretionary Trust, the Trust's assets and/or income do not vest in a Beneficiary until they are distributed by the Trustee to that Beneficiary. Discretionary Trusts are intended to operate in this manner to ensure legal title to Trust assets vests in the Trustee. This allows the Trustee to accumulate, maintain and eventually distribute Trust assets and/or income in its discretion, without intervention from Beneficiaries (or their creditors) claiming an interest in or right to Trust assets and/or income. 

Trust Deeds

Once you have obtained and considered the relevant advice and wish to proceed, it is prudent you engage a solicitor to draft and/or review your Discretionary Trust Deed. 

The purpose of a Trust Deed is to govern all key dealings between the Trustee and Beneficiaries. It is a customised document detailing the various duties, responsibilities, terms, conditions, and powers required to operate your Discretionary Trust in a manner that best suits your family and/or small businesses' needs. 

A typical Discretionary Trust Deed may include provision in respect of the:

  1. Appointment and removal of Trustees; 
  2. Trust income and capital distribution;
  3. Accounting policies and administration of the Trust Fund;
  4. Beneficiaries and excluded Beneficiaries; 
  5. Trustee's powers (and limitations on those powers), including the power to:
    1. purchase, sell, lease or mortgage Trust property, shares, and other assets;
    2. remove or add Beneficiaries;
    3. borrow or lend money on behalf of the trust; and/or
    4. resign and appoint a replacement Trustee 

allowing the Trustee to deal with Trust assets as they deem appropriate. 

In the event of any dispute between Beneficiaries and/or the Trustee or upon the vesting date, a Discretionary Trust Deed will likely be interpreted by persons who were not present during its drafting. It is therefore crucial that the Trust Deed is: 

  1. comprehensive in covering all possible scenarios a Trust could subsequently encounter;
  2. specific about the powers, duties and responsibilities of each relevant party; 
  3. easy to understand; and
  4. unambiguous. 

The objective for the creation of the Discretionary Trust should not be lost in drafting and result in misinterpretation or misappropriation of Trust assets and/or income. Engaging experienced professionals to advise on and prepare your documentation will help mitigate these risks. 

Key Takeaways

A Discretionary Trust can be an effective structure to build wealth for posterity. Through its distinguishing features which allow the Trustee to:

  • hold and accumulate assets for decades; 
  • distribute Trust assets and/or income, at its discretion, in a tax-effective manner; and 
  • protect assets from creditors of a bankrupt or insolvent Beneficiary, 

a Discretionary Trust promotes the creation, protection, and transition of wealth to future generations. 

It is important to seek professional advice as to the suitability of a Discretionary Trust to your needs as Discretionary Trusts are expensive and onerous to establish and maintain. 

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