Family Trust (Discretionary Trusts): A Guide for Business Owners in Australia

Setting up a family trust (discretionary trust) can seem perplexing. Dealing with terms like trustee, appointor, settlor, and beneficiaries – it can feel like you’re trying to decipher a foreign language.

Many small and medium-sized business owners think the same, so you’re not alone.

How does family trust work in Australia?

In Australia, a family trust is a type of discretionary trust commonly used by business owners. 

A family trust is established to hold and manage assets on behalf of family members. 

The family trust is governed by a deed outlining how the trust will operate. 

The trustee has discretion over how income and assets are distributed to beneficiaries, allowing for tax advantages and asset protection. 

Business owners commonly use this type of trust to preserve their wealth and pass it down to future generations. 

What is the purpose of a family trust for business owners?

The purpose of a family trust for business owners is to protect and manage their assets for the benefit of their family members. 

A family trust provides a legal structure that allows business owners to transfer their personal and business assets into the trust, which a trustee then manages. 

This arrangement allows the business owner to control the distribution of the trust’s income and assets to their family members while providing tax benefits and asset protection. 

Family trusts are commonly used as they give the trustee flexibility in distributing income and assets based on the needs of the family members. 

What are the risks of a family trust?

There are several risks associated with a family trust, especially for business owners. 

One of the main risks is the potential for conflicts and disputes among family members regarding the distribution of assets or control of the trust. Additionally, there is a risk of mismanagement or improper administration of the trust, which can lead to financial losses or legal repercussions. Moreover, family dynamics and relationships can get complicated, adding another layer of risk to the trust arrangements. 

Navigating the complexities of trust elements can be stressful, full of uncertainties and endless questions. We understand the confusion, the worry, and the need for clarity. 

That’s why we’ve broken down these complexities and aim to guide you through the main components of a family trust (discretionary trust).

Trustee

At the heart of every family trust lies the trustee. This is the individual or corporate entity entrusted with managing the trust property. 

The trustee’s role, as outlined by the Australian Tax Office, is a fiduciary one, meaning they must act in the best interests of the beneficiaries.

Being a trustee calls for a high degree of integrity and a comprehensive understanding of the trust deed and its legal implications. The decisions made by the trustee, from investment choices to income distribution, can significantly impact the trust and its beneficiaries.

Corporate Trustee vs Individual Trustee

A critical decision when setting up a family trust is whether to appoint an individual or a corporate trustee. Both options have pros and cons, but the specific circumstances of your situation will dictate the most appropriate choice. 

In more cases than not, a corporate trustee is recommended. It offers significant advantages, particularly in terms of legal and asset protection. 

A corporate trustee provides a layer of legal protection as the corporate entity, rather than the individuals involved, holds the responsibility. This can be especially beneficial in the event of litigation.

Additionally, a corporate trustee offers continuity and stability. Unlike an individual, a corporation doesn’t die, become incapacitated, or retire. This is particularly beneficial in managing the trust’s assets over an extended period, offering peace of mind for the beneficiaries.

Appointor

The appointor, sometimes referred to as the principal, is the individual(s) endowed with the power to appoint or dismiss trustees. 

This role is pivotal in managing a family trust since they hold ultimate control. However, they do not have automatic entitlement to the trust property or income unless they are also listed as beneficiaries.

Settlor

The settlor is the individual who initiates the trust by transferring property or assets to the trustee. 

Generally, their involvement is limited to the creation of the trust. 

Once the trust is in place, the settlor typically has no further duties or responsibilities and is most often excluded from being a beneficiary.

Beneficiaries

Beneficiaries are the individuals or entities who stand to benefit from the trust property. They can receive income, capital, or both at the discretion of the trustee. 

The trustee has the power to decide which beneficiaries receive distributions in any given year, hence the term ‘discretionary trust’.

In a family trust, beneficiaries are usually family members, but they can also include other entities connected to the family members and charities. This offers a degree of flexibility and potential tax benefits.

Next Steps

We’re here to help you navigate these complexities. If you need assistance understanding the role of these components in a discretionary trust, our team of experts is ready to help. 

We invite you to book an appointment online or call us at 0755361960 to discuss your specific needs and find a solution tailored to you.

Frequently Asked Questions

  1. What is the difference between a trustee and an appointor? The trustee manages the trust property, while the appointor holds the power to appoint or remove trustees.
  2. Can the settlor also be a beneficiary? Yes, the settlor can be a beneficiary. Still, most modern deeds will exclude the settlor from being a beneficiary, so the settlor’s involvement with the trust usually ends once it’s established.
  3. Who can be a beneficiary in a family trust? Family members are the usual beneficiaries in a family trust, but companies, trusts and partnerships connected to the beneficiaries as well as charities can also be included.

Understanding the intricacies of setting up a family trust may seem daunting, but with the right guidance and support, it’s a task you can conquer. 

Consider seeking advice from an accountant to ensure your trust structure aligns with your business goals and abides by Australian Tax Office requirements.

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