In Australia and New Zealand, a discretionary trust is also called a family trust. A discretionary trust is one in which beneficiaries and/or their entitlements are not fixed, but are instead discretionary in two ways:
trustees have the power to determine which beneficiaries will receive payments from the trust
trustees can select the amount of trust property the beneficiaries receive.
There are two types of discretionary trusts:
exhaustive trustees must distribute all income accruing to the trust fund
non-exhaustive trustees have an express power to accumulate income
Step One: who are your trustees and beneficiaries?
Trustee/s: the person(s)/company given control of property in trust with the legal obligation to administer it only for the specified purposes.
The trustees must deal with the trust property as set out by the settler in the trust deed. They must act in accordance with any relevant law (e.g. state/territory law, tax law, etc.) and are personally liable for debts of the trust.
Beneficiary/ies: the person(s) who benefit from the trust. They receive distributions from the trust at the discretion of the trustees. Beneficiaries have the right to receive accurate and adequate information pertaining to the trust and its management.
Beneficiaries also have a right to action. If they suspect that a trustee is violating their responsibilities, they may request a special accounting from the trustee. Following that, they may request the removal of the trustee and ask for a replacement.
Step Two: The Trust Deed
The trust deed details how the trustees must manage the trust, as well as all the relevant details required for the trust to be valid. It is recommended you obtain legal advice and assistance for the drafting of the trust deed because of the importance and complexity of this document.
Step Three: Settle your trust deed!
A nominated Settlor (someone who is not a beneficiary) signs the trust deed. This person is usually the accountant or lawyer.
Step Four: Are your trustees on board?
By this stage of the process, your appointed trustees should be aware of their responsibilities according to the terms of the trust as they have been outlined in the trust deed. Once the trust deed has been settled, your trustees will then sign it.
Step Five: Stamp duty
In order to formalise documents, you usually have to pay a stamp duty in order to validate them. This will also have to be done with your trust deed. The stamp duty payment varies according to region. For example, it is AUD 500 in NSW.
Step Six: Finish up!
Once all of the above steps have been completed, all you have left to do is to apply for a Tax File Number (TFN) and an Australian Business Number (ABN), both of which can be done online.
We hope this guide is helpful in breaking down the steps to creating a discretionary fund. It’s really not that scary although it can seem overwhelming. Good luck!