What are family discretionary trusts?
Family discretionary trusts are an estate planning tool that can be used for the benefit of your family including your children and grandchildren. The persons who benefit are called beneficiaries. Such a trust is created by you executing a Trust Deed and appointing a trustee (often a company) as being responsible for the management of the trust assets. The trustee holds these assets on behalf of a class of beneficiaries such as yourself, your spouse, your children and your grandchildren. This may have significant tax and other advantages for the family.
The trustee could administer the trust in such a way as to ensure that you continue to receive the benefit of those assets – however you would also formally cease to own those assets. There are stamp duty and land tax issues. You may also need professional advice should you wish to purchase or transfer assets to the trust.
The assets owned by the trust would not be part of your estate once you pass away. As such, there would be no automatic distribution from the family trust to any person upon your death. Once a deceased person has passed away, the trustee would continue to own and manage the assets for benefit of the beneficiaries and includes deceased’s spouse, children and grandchildren etc.
One benefit of this arrangement is that the assets would not be the subject of a family provision claim as they would not form part of the deceased’s estate.
It is important to ensure that you do not have direct control over the trust. This is because if you have complete control over the trust then it is possible that some of the protections associated with the trust may be lost. It is for this reason that it is usual for two trustees to be appointed or two directors if a company is appointed as the trustee.
What are the benefits of family discretionary trusts?
Creating a family discretionary trust has numerous benefits.
First, if the trust owns assets that are producing an income (e.g. rent from a property or dividends from shares) then the income from those assets can be divided up between your family in such a way that minimises tax. The trustee may distribute the income to individuals, to a superfund or to a company, and then the beneficiary or beneficiaries pays tax at the appropriate tax rate. Therefore, the trustees can make payments to beneficiaries who sit in a low tax bracket whom will pay minimal tax. This arrangement can only work for adults as payments to under-18s are heavily taxed. This means you can make multiple uses of lower tax rates and the tax-free threshold, for example, to benefit university-aged children or retired parents.
Another problem that may arise are disputes between your children concerning how the trust assets are to be managed if you were to pass away. For this reason, serious consideration needs to be given as to who you want to control the trust and what restrictions you might impose on the trust.
If you would like advice from our experienced lawyers about family trusts, contact us today.
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.
