What is a discretionary trust?
A discretionary trust (often called a “family trust”) is a widely-used personal and business investment structure which permits a trustee to hold assets for 1 or more beneficiaries, and to distribute income and capital between the beneficiaries at the trustee’s discretion.
The person who sets up the trust is called the “settlor”. The settlor contributes the original property or amount of money (often as little as $10) to the trust and signs the trust deed together with the trustee. The settlor then has no further involvement with the trust. In many family trusts, the settlor is the family accountant or lawyer.
The person who appoints or removes the trustee is called the “appointor”. The appointor can also themselves be a trustee. Typically in a family trust the appointor/s are Mum and Dad.
The trustee then manages the trust on a day to day basis.
Who are the beneficiaries?
The beneficiaries are the people for whom the trust is established. There are commonly two levels of beneficiaries. Primary beneficiaries (or “nominated beneficiaries”) and secondary beneficiaries (or “general beneficiaries”). Primary beneficiaries are commonly the immediate family members and secondary beneficiaries are commonly more remotely related to the primary beneficiaries and can include companies and trusts in which the primary beneficiaries either own shares or have an interest.
Can a trustee also be a beneficiary?
Well yes, but a trustee cannot be the only beneficiary. This is because for a trust to exist there has to be a separation between the trustee and the beneficiary, whereby the trustee holds property “on trust for” the beneficiary. This is why in practice, many family trusts are set up with a company trustee, the directors of which are the main beneficiaries. It is also why discretionary trust deeds normally include a long list of secondary beneficiaries.
Banks may refuse to lend to a trust where the trustee and primary beneficiary are the same person.
Can the settlor be a beneficiary?
No, for two reasons:
- Section 102 of the Income Tax Assessment Act 1936 provides that if the person establishing a trust (settlor) has the power to terminate the trust (ie is the same person as the trustee and in some cases a beneficiary) then the trust will be deemed not to exist and the settlor will be personally taxed on the whole of the trust income.
- If the settlor is a beneficiary then arguably the settlor will not have divested him/herself of the trust assets and as a consequence there may be no trust relationship.
What is the minimum amount of a settled sum?
Any amount however small can be the settled sum. It can be as low as $1.00, commonly it is $10.00 or $100.00. The trustee must ensure the settled sum is properly receipted into the funds of the trust and accounted for throughout the life of the trust. This is because if the settled sum is never paid to the trustee then there is no trust property and the trust never comes into existence.
Can a beneficiary be added to a discretionary trust?
Technically, yes, but if the trust is already established, adding a beneficiary will require the trust to be formally varied, triggering capital gains tax and other potential tax consequences. This is why the definition of beneficiary in most discretionary trusts (including Startup World’s) is very broad so it may not ever be necessary to add a beneficiary.