Why have a Family Discretionary Trust?

There has been a noticeable increase in the number of people who are choosing to operate their businesses or manage investments through the vehicle of a discretionary family trust.  

A discretionary family trust (otherwise known as a inter vivos trust) is a type of trust that has been established during a person’s lifetime. It has a number of unique financial benefits. These include that it allows a family to minimise the amount of tax that they otherwise might be paying. This is achieved as the trustee (the manager of the trust) is able to divide the income that is being generated by the assets owned by the trust between a large class of beneficiaries (e.g. spouses, children, parents, siblings etc.) in such a way that minimal tax is paid on this income. 

The main reason for this is because an individual who is over the age of 18 years is able to receive an income of approximately $18,200.00 tax free. This is particularly useful the person who has established the family discretionary trust has a number of adult family members who are on a low income.  

For instance, this might apply where a parent is working part time and performing domestic duties within the home.  It also applies where there are children who are over the age of eighteen and only working part time.  It also applies the parents of the person who established the discretionary family trust are retired and therefore not receiving a significant income.  In each instance the structure of the trust is able to take advantage of the fact that there may be various family members who are on a reduced income and who are therefore able to receive income from the trust in such a way that minimal taxation is paid. 

Another benefit with managing investments through the vehicle of a family discretionary trust is that the assets of the trust are effectively safe from third party creditors.  This means that if someone get sued or becomes bankrupt – assets that would otherwise be available to these creditors are instead protected as they are being held as part of the trust.  This is because the assets of the family discretionary trust do not “belong” to any one individual.  

Who owns a family discretionary trust?

Technically nobody “owns” the assets of a family discretionary trust.  Instead there is a trustee (who is the manager of the trust) and there are also beneficiaries (classes of person who are entitled to receive an income or capital from the trust).  The assets of the trust are therefore being held by the trustee on the behalf of several beneficiaries.  This means that neither the trustee nor the beneficiary “own” these assets.

What happens when a trustee or a beneficiary die? 

Many people often assume that any assets owned by a family discretionary trust will automatically form part of a deceased’s estate once they have passed away. This is not the case. 

Instead, if someone who has established a family discretionary trust dies he assets owned by the trust will continue to be managed by the trustee of the trust on behalf of the beneficiaries.  This will continue until such time as all of the assets within the trust have been distributed to the various beneficiaries or the trust comes to an end.  The trust must come to an end on the “vesting date” (normally eighty years after the trust has been established) if not at an earlier date, at which point the remaining assets within the trust will be distributed by the trustee to the various eligible beneficiaries. 

What happens to a discretionary family trust will when a person who has established a trust dies will always depend upon the terms of the trust deed, however it is not uncommon for the executor of the deceased estate to assume control over the trust as either the trustee is a company that was owned by the deceased or alternatively the terms of the trust provide that the executor of the trustee or appointor will assume the role as trustee.  It is therefore very important that a will maker give careful consideration as to who they appoint as their executor. 

Sometimes a will maker will only appoint one of their children as the executor of their will, not realising that this means that the person who they appoint as executor may assume sole control of any family discretionary trust already established or that may later establish during the will maker’s lifetime.  This can cause disputes within families if different children have different attitudes as to how the assets or income generated by the trust is to be managed or distributed. 

Similarly, where a will maker owns or is a director of a company that is the trustee, they need to give careful consideration as to who it is that they want to assume control of that company once they have passed away. 

Determining who has “control” of the trust is always the key issue within a family discretionary trust.  Sometimes control is vested within the trustee – whereas other times it is the “appointor” who is deemed to have ultimate control as they have the ability to appoint and remove the trustee.  In each instance it is important that due consideration be by the will maker as to who it is that they want to be in charge of the trust.  

What happens when a trust deed has been lost?

The Trustee Act in each state has certain “default provisions” that can be applied where a trust deed has been lost or is silent.  It is not unusual for the relatives of a deceased to know where the original trust deed may be that governs the operation of a trust.  For this reason, it is often recommended that a will maker leave a copy of the terms of the trust with their will or alternatively clear instructions as to where any terms of a trust deed can be found.  

Can a deceased person be a beneficiary of a trust? 

Yes – in certain circumstances a deceased person or their estate can be a beneficiary of a trust, however this will often depend upon the details of the specific trust deed.  In many circumstances, it also may be possible to make distributions to a company that was owned by a beneficiary who is now deceased.  It is important that you seek specialist legal advice before attempting to make any such distribution. 

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DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice.