This week’s video is a quick guide on all information regarding a Discretionary Trust. The advice below and in the video contains general advice and information and does not take into consideration any personal circumstances.
What is Discretionary Trust:
A discretionary trust addresses the relationship in which one person legally owns an assets for the benefit of another person or set of persons.
The individual who legally owns the asset is called the trustee, and the person or persons for whose benefit the asset is held is called a beneficiary.
A discretionary trust is also known as a family trust. This is important to know as the beneficiaries are all, or predominantly, members of the same family. In a discretionary trust, it is the trustee’s job to decide the net income and capital which will be distributed to the beneficiaries named in the trust.
The income tax, capital gains tax and asset protection advantage attached to a discretionary trust means that they are often the preferred method of structuring a business or investment activity, even when the business or investment is only of modest size.
Advantages & Disadvantages of using a Discretionary Trust:
There are many benefits that come with using a discretionary trust…
- A discretionary trust is a great tool for managing family wealth and can be used to protect the assets of a family.
- A discretionary trust offers tax benefits and helps to streamline tax affairs and allocate family resources where best needed.
- A discretionary trust enables income with different tax characteristics to be streamed to family members individually. The structure can also be applied to non-family beneficiaries.
However, with these positives are also some negatives that come with using a discretionary trust.
- The major disadvantage of a trust is that it cannot distribute capital or revenue losses to its beneficiaries. As a result, should a trust incur a net loss its beneficiaries will not be able to offset that loss against any other assessable income that they may derive.
It’s important to know that expert advice should be sought if it’s expected that a trust may make a revenue loss or a capital loss for taxation purposes.
- The appointor is usually nominated in the schedule to trust deed and is typically the person (or persons) who decides to set the trust up in the first place.
- The appointor controls the trust, since if the trustee did not follow the appointor’s directions, the appointor would simply sack the trustee and appoint a more compliant trustee in its place.
- It is the trustee’s job to decide the net income and capital which will be distributed to the beneficiaries named in the trust.
- The trustee has legal ownership but not beneficial ownership of the assets in the trust and it is their job to decide the net income and capital which will be distributed to the beneficiaries named in the trust.
- The beneficiaries are the persons for whose benefit the trustee holds the trust property.
- In most trust deeds the “primary beneficiaries” will be specified and will usually be the people setting up the trust, and perhaps their children or other close relatives The “general beneficiaries” will be defined by reference to the primary beneficiaries.
- The settler (or, sometimes, the grantor) is the person who the law treats as establishing the trust.
- The settler is an unrelated person, generally an accountant or financial adviser. The settler cannot derive any benefit from the trust.
Selling Your Business:
For some businesses there comes a point in time when an owner may want to sell. However, if you have been operating in the cash economy, running most of your business off the books you are going to have a difficult time selling your business for it’s true value.
When selling your business, the purchase price is going to be heavily impacted and determined by how profitable the business actually is. When an accountant or business broker values a business, they can only use data that is reported in your financial statements, which means that all cash sales are ignored.
Typically speaking a business valuation will be based off three to five years of business activity, which is taken off the financial statements of the business. So, for all your hard work over the years, (the sale price could be funding two very different retirement plans – Cairns every summer vs Bonnie Doon every summer), the final sale price will not represent the effort and hard work you have done to build a successful business.
In whose name should assets be held:
The trustee is the legal owner of the trust’s property. This means the trustee’s name should appear on all ownership documents, such as shares in private companies, units in private trusts, or title deeds for land ownership.
Checklist/Summary of establishing a Discretionary Trust:
- Sign the documents: The documents must be signed by the trustee(s) and the settlor. All signatures must also need a witness.
- Apply for a TFN: Once the trust has been established a TFN application should be lodged with the ATO. If the trust is running a business, then it will also need an ABN. These applications can often take up to 28 days to be processed.
- Stamping: stamp duty may be payable on the trust deed. Please contact the state revenue office in your state to enquire about the stamping requirements. Each state has different rules and charges for stamping deeds.
- Open the bank account: when the trust deed has been stamped then a bank account should be opened for the trust in the name of the trustee as trustee for the trust. The bank may require the trust TFN before it will open the account.
- Discretionary Trust is operational: when all these steps have been followed the discretionary trust is operational and is able to accept contributions.
If you have any further questions on Discretionary Trust or any issues relating to your personal satiation, then please do not hesitate to contact NGR Accounting for help.