As the description infers, discretionary trusts are structures under which the controllers exercise discretion in undertaking their responsibilities. Trustees are the appointees able to exercise this descretion, including in relation to investment and administrative matters. The most interesting discretion for purposes of this discussion, for asset protection and for taxation purposes is –
- the degree of discretion the trustee has over the distribution of income – and
- of assets.
…but, what is a Trust?
A trust is a relationship between the
- trustee (who legally owns the assets on behalf of the beneficiaries) and
- the beneficiaries themselves.
Trust provisions are documented in a ‘trust deed’. They may be created under –
- a Will (a testamentary trust); or
- to hold investments of a close group or family (a ‘family’ trust).
The founding deed contains a set of rules which determine what the trustee –
- can and cannot do with the trust’s income and assets,
- under the constraints of trust law.
Trustees act under the prescribed rules. They are to manage the trust’s assets with at least as much care as they would their own financial affairs.
The trustee holds title to the capital assets of the Trust; and manages them for the benefit of the beneficiaries. The Trustee also decides the timing of distribution of income and capital of the trust. The beneficiaries have no prior legal right to the income or the capital of the trust and only become entitled to distributions once the trustee has made such determination. (This is important for consideration when drafting an Estate Plan. Many people confuse Trust assets as being theirs to bequeath – which is not directly the case.)
Professional input is essential setting up a trust deed. This will ensure that the trustee has appropriate authority specified by the deed.
What is a Discretionary Trust?
A discretionary trust operates as above, but –
- with the distinction that the trustee exercises a discretion as to which of the eligible beneficiaries are to receive any income earned by the trust, or
- any capital they choose to distribute.
What are the advantages of such a trust?
Some of the main advantages of a discretionary trust include:
- Efficient tax planning for families. Income is able to be directed to members with a low marginal tax rate,
- Asset protection. Providing protection in the event of divorce, bankruptcy or legal action; and
- Effective estate planning.
Who are the stakeholders in a trust?
The parties to a discretionary trust, are similar to those in most commonly observed trusts: they include –
- Settlor – The settlor is the person who establishes the trust, conferring assets to the trustee for the benefit of the trust beneficiaries. For taxation purposes the settlor cannot be the sole beneficiary.
- Trustee – The trustee is the person or entity who holds the assets on behalf of the beneficiaries. They are the legal owners of the assets and must manage the trust. The trustee may also be a beneficiary of the trust.
- Beneficiary – Beneficiaries are the people or entities entitled to receive a distribution from the trust. They can include individuals, companies and other trusts. Beneficiaries (or the class of beneficiaries) should be – and usually are, identified in the trust deed.
- Appointor – Any appointor nominated in the trust deed holds underlying control of the trust. They have the power to change the trustees of the trust if they wish. A discretionary trust does not need to have an appointor. It is generally advisable to appoint one. In some circumstances the Settlor also acts as the Appointor.
Do discretionary trusts pay tax?
Trusts are not liable to pay tax on income that is distributed in full to their beneficiaries.
Income retained –
- within the trust, and
- to which no beneficiary is presently entitled,
is taxed at the maximum marginal rate applicable to individuals.
This rate was 46.5 per cent, including the Medicare Levy. The rate can vary with change to government tax policy. The ATO website is updated to reflect the applicable rate.
As a beneficiary, any income that you receive from a discretionary trust is assessable to you. All income earned by a Trust retains its character when distributed to beneficiaries. It is taxed as if you earned it directly. An example is dividend income. This income may include franking credits and grossed up capital gains or losses. (You should refer to your Tax Agent or other tax professional for personal advice as to how these distributions affect you.)
Do I need a trust to best manage my wealth accumulation?
Where appropriate, we recommend the use of discretionary trusts by our clients to hold identified investment assets that are ultimately intended to benefit –
- the family or
- particular dependants.
The experienced advisers at Continuum Financial Planners Pty Ltd are able to provide wealth management advice to trusts as well as companies, self-managed superannuation funds (and to advise on the benefits of using particular structures to hold wealth); as well as to individuals.
To learn more about how our advisers can bring value to achievement of your investment goals, make an appointment to meet with one of our team, by –
- phoning our office, on 07-34213456, or
- at your convenience, use the linked Make A Booking facility.
‘we listen, we understand; and we have solutions’ to your wealth management needs, that we deliver in personalised, professional advice.
(This article was first posted by us in August 2009. We occasionally refresh/ update the article, most recently in May 2025.)
