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Discretionary Trust or Family Trust Setup in 5 Easy Steps


Setting up a trust may seem like a headache — but can be achieved through a streamlined process. In this article we’ll break down the trust establishment process.

There are many reasons to set up a trust. Establishing a trust can assist with the management of property and assets, provide for family members, or minimizing the potential of probate. A trust is essentially a legal relationship in which a trustee holds assets on behalf of beneficiaries.

Discretionary trusts, also referred to as “family trusts”, are trusts in which the trustee is given the discretion to decide which beneficiaries will benefit from the trust. In this article, we’ll break down the five steps involved in setting up a family trust in Australia.

What Are the Advantages of Setting up a Trust?

    Discretionary trusts can deliver a wide range of benefits:

  • Asset Protection
    Assets held by a discretionary trust are held separately to the assets of beneficiaries. This ensures that trust-held assets are protected from creditors should a beneficiary enter bankruptcy or is sued. When setting up a business structure a trust may assist.
  • Tax Strategy & Planning
    Discretionary trusts are able to assist with tax planning. The overall tax obligation paid by a family assisted by a discretionary trust can be reduced by distributing income or capital to beneficiaries on lower tax marginal rates. Tax can also be reduced by distributing different types of income to trust beneficiaries through a process called “streaming”.
    Beneficiaries are able to pay tax at a marginal rate based on income distributed from a trust in each financial year.
  • Carry Forward Losses
    In specific circumstances discretionary trusts are able to carry forward losses
  • Capital Gains Tax Discount
    Discretionary trusts benefit from a 50 percent capital gains tax discount on capital gains generated by the disposal of assets if the trust holds these assets for a period greater than 12 months.

How to Set up a Trust

Depending on your personal circumstances, a discretionary trust can help minimize tax obligations and protect your assets. It’s advisable to consult with a tax professional before setting up a trust for your family. The process of setting up a trust is relatively simple, however, and is outlined below:

1. Choose a Trustee

Selecting a trustee is the most important element in establishing a discretionary trust. A trustee is the legal entity or individual responsible for administering a discretionary trust. A trustee will manage a discretionary trust in accordance with the terms outlined in the terms of the trust deed.

A trustee can be a single individual, several individuals, or a private proprietary limited company. In the case of a proprietary limited company trustee, the company is incorporated specifically to function as a trustee.

Incorporating a company can be a complicated and costly process. Setting up a proprietary limited company to act as a trustee minimizes the risk of personal liability in trust administration, however. individual trustees present a higher personal liability risk profile when compared to the directors of a corporate trustee.

Establishing a corporate trustee also minimizes administrative friction when changes in individual trustees impact the registered owner of each trust asset.

2. Draft a Discretionary Trust Deed & Settle the Trust

After selecting a trustee, it’s advisable to engage professional services in order to draft a deed of trust. The trust deed must then be signed by an individual unrelated to the beneficiaries of the trust — referred to as the settlor.

For tax reasons, it’s recommended that the settlor not be a beneficiary of the trust. The settlor signs the trust deed, and then gives an initial settlement sum to the trustee. Settlors typically have no involvement with a discretionary trust after the initial settlement process.

Subsequent to trust settlement, the trustees then hold a formal meeting in which they accept their appointments as trustees of the trust and agree to be bound by the terms outlined in the trust deed.

3. Pay Stamp Duty

Trust deeds incur a payable stamp duty. Stamp duty functions as a state-based tax that varies across the states of Australia. Each state possesses a revenue authority that provides information on whether or not stamp duty must be paid on a trust deed and, if so, how much. If you’re not sure whether you need to pay stamp duty, it’s best to engage professional services.

Regardless of whether a trust deed incurs stamp duty, a trust deed must be lodged with the relevant revenue authority.

Stamping can be performed directly with the local revenue authority in your state or arranged by an accountant, service provider, or lawyer. New South Wales stamp duty obligations mandate that a stamp duty of $500 must be paid for each new discretionary trust within 3 months of establishment.

New South Wales stamp duty is administered by the NSW Office of State Revenue and operates in accordance with accordance with the Duties Act 1997 (NSW). Stamp duty is important — interest is incurred if stamp duty is not paid within the designated time period.

4. Apply for an ABN and a TFN

After the discretionary trust has been established it’s necessary to apply for both an Australian Business Number (ABN) and a Tax File Number (TFN) for the trust. Both applications can be made online. ABN registration is typically completed instantly — TFN applications can take up to 28 days to complete.

5. Set up a Bank Account

Lastly, a bank should be opened in the name of the trustee, as a trustee for the trust. A bank may require an ABN for the discretionary trust. Trust bank accounts should only be created after the trust is established and stamp duty has been paid if required.

The settlement sum must be the first deposit into the trust bank account and performed before any other transactions or deposits are made. At this point the family trust is now operational and can accept further settlement sums, as well as borrow capital or make investments in accordance with the terms of the trust.

When considering establishing a trust, it’s best to engage the services of tax or accounting professionals in order to determine whether a discretionary trust is appropriate for your business structure. If you’re setting up a discretionary trust, get in touch with Fullstack today.

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Stuart Reynolds
is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.

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