discretionary trust

A discretionary trust (also known as a family trust) is a trust established to hold a family's assets or operate a business. Generally, they are established for asset protection and/or tax purposes.

The benefits of a discretionary trust include:

  • Flexibility on income distributions. The trustee decides before the 30th June each financial year how that year's trust income is to be distributed between the various beneficiaries. Generally, income will be distributed to beneficiaries in lower tax brackets.
  • Ability to distribute income to adult children (aged over 18 years) who are either studying or working part-time and are in low tax brackets. Could distribute $18,200 tax free to a child studying full time.
  • Ability to stream capital gains and franked dividends to specific beneficiaries. For example, capital gains should be streamed to beneficiaries with carried forward capital losses.
  • Provides asset protection from creditors, ex-spouses, legal claims, etc.
  • Ideal structure for owning capital appreciating assets (such as land and shares) as the beneficiaries can access the 50% CGT discount on any realised capital gains (if the assets were owned for more than 12 months).
  • Allows for succession planning and the transfer of wealth to future generations without immediate tax consequences.
  • Ability to hold personal use assets such as holiday homes, boats, racehorses, etc.
  • Reduces the land tax payable on multiple properties by owning each property in a separate family trust (thereby having each family trust access the tax-free threshold for each individual property).
  • There are no investment rules, no contribution rules, and no preservation rules (unlike superannuation).

Implementation process:

  • Establish a company as trustee (best practice).
  • Establish the discretionary trust.