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Trust Loan

What is trust?

Trust is a relationship where a person (the Trustee) is under an obligation to hold property for the benefit of other persons (the Beneficiaries). The terms of the obligation are defined by the terms of the Trust Deed entered into between the Trustee and the Settlor.
The Trustee is the legal owner of the trust property and the beneficiaries hold the beneficial interest in the trust property.

What is a Discretionary Trust ?

A discretionary trust (often referred to as a family trust when the beneficiaries are linked via family relationships) is one of the most common types of trusts in Australia. They are set up for one or more reasons:

  1. to protect the assets of a family
  2. to hold the assets for future generations of the same family
  3. to legally lower the amount of tax payable by the family unit as a whole, by being able to distribute income to companies and trusts associated with family members, some of which may have a trading loss, a capital loss or low income.

Other benefits include:

  1. a relatively low cost and simple structure to use
  2. the ability to stream income which has different tax characteristics differentially between family members
  3. the ability to use this type of structure for non-family beneficiaries. Please speak with us if this interests you.

What is required?

There are 4 roles that need to be considered when establishing a discretionary trust:

The Settlor
The settlor is the person who creates the trust by “settling” a sum of money or item of property on trust for the beneficiaries.

The Trustee
The trustee is the legal owner of the trust property although not the beneficial owner. The trustee carries out all transactions of the trust in its own name and must sign all documents for and on behalf of the trust. The trustee’s overriding duty is to obey the terms of the trust deed and to act in the best interests of the beneficiaries.

The Appointor
The Appointor is the person named in the Trust Deed who has the power to remove and appoint trustees. This would commonly occur when:

  • the trustee dies, becomes bankrupt or is incapacitated;
  • in the case of a company, the company is wound up.

The Beneficiaries
The beneficiaries are the people (including entities) for whose benefit the trustee holds the trust property. A discretionary trust usually has a wide range of beneficiaries, including companies and other trusts. The beneficiaries of a discretionary trust do not have an interest in the assets of the trust. They merely have a right to be considered or a mere expectancy until such time as the trustee exercises its discretion to make a distribution.The general beneficiaries are those beneficiaries named in the trust deed who are eligible to receive a distribution of income or capital at the discretion of the trustee (subject to the approval of the Appointor). The remainder beneficiaries are the beneficiaries automatically entitled to receive a proportionate distribution of income or capital to the extent that the trustee has not exercised its discretion otherwise.

The Trust Fund
The trust fund is all the property of the trust including the settlement sum, accumulated income and any other money and property held by the trustee pursuant to the terms of the trust.

The Trust Deed

The trust deed defines the relationship between the trustee and the beneficiaries. The parties to the trust deed are the settlor and the trustee. The trust deed specifically sets out the duties and powers of investment of the trustee, the beneficiaries, and other important stuff.

Why use a discretionary trust?

  • Tax Benefits
  • Asset Protection
  • Estate Planning
  • Land Holdings

As a general rule, trusts are a more tax effective structure as a holding entity for investment and commercial real estate and other fixed assets. This is because the government decided that from September 1987 they would tax capital gains on the disposal of assets (other than personal assets and your principle place of residence).

Individuals are provided a 50% exemption from CGT.  This exemption will apply to a discretionary trust where the potential beneficiaries are all individuals (not companies). Companies receive no such exemption.