Protecting assets and preserving wealth through Discretionary Trusts – Trusts

What is a Trust?

A Trust is formed when a person or entity (the
Trustee) holds assets for the benefit of another
person or class of persons or entities (the
Beneficiaries). Strict legal and fiduciary
obligations are imposed upon the Trustee in order to protect the
Beneficiaries’ interest in the trust assets. Under these
obligations, a Trustee must act: 

1. in good faith, honestly and not profit from the Trust (as
   Trustee); 




2. with due care, skill and diligence and avoid conflicts of
   interest; 




3. in the best interests of the Beneficiaries; 




4. to preserve the Trust property; 




5. in person and not delegate their duty to another person;
   and 




6. transparently and account and provide information to the
   Beneficiaries, upon request.  

The Trustee’s failure to comply with its fiduciary
obligations can result in the Beneficiaries commencing legal
proceedings against the Trustee in respect of such
breach.   

Additionally, the Trustee also assumes legal responsibility for
the operation, management, and liabilities of the Trust as a Trust
is not a legal entity. The Trustee would normally have a right of
indemnity under the trust deed. 

Discretionary Trusts

While there are various types of trusts, a Discretionary Trust
is prevalent among families, family-run business or small
businesses for its tax, wealth accumulation and asset protection
benefits. 

The Trustee of a Discretionary Trust may, in its discretion,
allot Trust assets and/or income to certain Beneficiaries as the
Trustee considers appropriate. This allows the Trustee to
distribute income for tax efficiency and protect trust assets from
creditors of bankrupt or insolvent Beneficiaries.

Further, Discretionary Trusts may also prescribe a ‘vesting
date’, being the date on which the Trust ends and Trust assets
are distributed to the Beneficiaries. In New South Wales, a private
trust can last for up to 80 years. Where the vesting date is well
into the future, Trust assets and wealth can be built up over many
decades before being distributed to Beneficiaries. 

Key Considerations

There are potential drawbacks to Discretionary Trusts, which
should be carefully considered to determine the appropriateness of
a Discretionary Trust to your family or business needs. 

It is prudent to obtain taxation advice prior to establishing a
Discretionary Trust as there are costs, expenses and tax and stamp
duty implications associated with establishing and managing
Discretionary Trusts, including if you intend to transfer real
property from yourself to the Trust. Additionally, bookkeeping and
reporting obligations require timely management and administration
of the Trust’s affairs by the Trustee, which can also be costly
and time-consuming. 

In the case of a Discretionary Trust, the Trust’s assets
and/or income do not vest in a Beneficiary until they are
distributed by the Trustee to that Beneficiary. Discretionary
Trusts are intended to operate in this manner to ensure legal title
to Trust assets vests in the Trustee. This allows the Trustee to
accumulate, maintain and eventually distribute Trust assets and/or
income in its discretion, without intervention from Beneficiaries
(or their creditors) claiming an interest in or right to Trust
assets and/or income. 

Trust Deeds

Once you have obtained and considered the relevant advice and
wish to proceed, it is prudent you engage a solicitor to draft
and/or review your Discretionary Trust Deed. 

The purpose of a Trust Deed is to govern all key dealings
between the Trustee and Beneficiaries. It is a customised document
detailing the various duties, responsibilities, terms, conditions,
and powers required to operate your Discretionary Trust in a manner
that best suits your family and/or small businesses’
needs. 

A typical Discretionary Trust Deed may include provision in
respect of the:

1. Appointment and removal of Trustees; 




2. Trust income and capital distribution;




3. Accounting policies and administration of the Trust Fund;




4. Beneficiaries and excluded Beneficiaries; 




5. Trustee’s powers (and limitations on those powers),
   including the power to:
   

   1. purchase, sell, lease or mortgage Trust property, shares, and
      other assets;

   
   

   2. remove or add Beneficiaries;

   
   

   3. borrow or lend money on behalf of the trust; and/or

   
   

   4. resign and appoint a replacement Trustee 

allowing the Trustee to deal with Trust assets as they deem
appropriate. 

In the event of any dispute between Beneficiaries and/or the
Trustee or upon the vesting date, a Discretionary Trust Deed will
likely be interpreted by persons who were not present during its
drafting. It is therefore crucial that the Trust Deed is: 

1. comprehensive in covering all possible scenarios a Trust could
   subsequently encounter;




2. specific about the powers, duties and responsibilities of each
   relevant party; 




3. easy to understand; and




4. unambiguous. 

The objective for the creation of the Discretionary Trust should
not be lost in drafting and result in misinterpretation or
misappropriation of Trust assets and/or income. Engaging
experienced professionals to advise on and prepare your
documentation will help mitigate these risks. 

Key Takeaways

A Discretionary Trust can be an effective structure to build
wealth for posterity. Through its distinguishing features which
allow the Trustee to:

• hold and accumulate assets for decades; 




• distribute Trust assets and/or income, at its discretion, in a
  tax-effective manner; and 




• protect assets from creditors of a bankrupt or insolvent
  Beneficiary, 

a Discretionary Trust promotes the creation, protection, and
transition of wealth to future generations. 

It is important to seek professional advice as to the
suitability of a Discretionary Trust to your needs as Discretionary
Trusts are expensive and onerous to establish and
maintain. 

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