Here are some of the most important benefits of having a discretionary trust in Australia
Asset protection in discretionary trusts
A discretionary trust can be used to hold assets and or conduct a business so that your assets are protected from litigation. In this respect, a trust is not a separate legal entity that can be sued directly. Furthermore, a trust does not hold legal title to assets. Instead, a trustee of a trust is the legal entity. They can either be a natural person or a company. The Trustee is the entity that is sued and incurs the liabilities of the trust. This insulates the beneficiaries of the trust as they do not have a claim over the assets of the trust. So if action is taken against a beneficiary the assets of the trust are protected.
Bankruptcy protection with discretionary trusts
If a discretionary trust owns a business and the property from which the business does business, where a beneficiary becomes bankrupt, only the assets belonging to the beneficiary are used to pay the bankrupt’s creditors. The beneficiary does not have a claim to or ownership of the assets of the discretionary trust so the bankruptcy trustee would not be able to seize assets of the trust to satisfy creditor’s claims.
In this respect, a beneficiary who owns shares in a company that operated a business or owned property would be available to satisfy the bankrupt beneficiary’s creditors. However, it is important to note that assets transferred to the trust from the bankrupt beneficiary can be clawed back.
However, for unit trusts and hybrid trusts where the beneficiary receives a fixed unit, then these units can be seized by a bankruptcy trustee. The bankrupt trustee may also take control over the trustee if the beneficiary held the majority of units in the trust. It is important to review how the trust is structured because the trustee can continue to exclude the unitholders that include the bankrupt beneficiary from receiving a distribution of income and capital.
Family court proceedings and discretionary trusts
The Family Court can consider the trust assets a beneficiary is potentially entitled to receive when apportioning the matrimonial assets. This is the case when there is income distributed to the beneficiary or a beneficiary is owed money from the trust via beneficiary loans. However, a properly structured discretionary trust cannot be used to satisfy the spouse in the proceedings. It is normally fixed or hybrid trusts where the beneficiary has units which can form part of matrimonial asset pool. In this respect, the terms of the trust deed is important since the trustee can continue to deny the beneficiary’s spouse from receiving a distribution of income or capital.
If you have a family law proceeding, it is important the trustee of the trust receives legal advice since the beneficiary will be exposed to risks. Income or capital that is distributed to a beneficiary can be applied for the benefit of a beneficiary’s spouse.
To effectively utilise discretionary trusts to avoid assets being part of family law proceedings, it is important for the appointor to be carefully selected. The appointor can appoint, add or remove trustees as well as require their approval to amend the trust deed, nominate additional beneficiaries and authorise capital distributions of the trust fund. It is best practice to engage an independent appointor such as a professional advisor or a trusted friend.
Distributions of discretionary trusts
Discretionary trusts that include income
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