What is a Discretionary Trust?
Discretionary trusts are a form of trust whereby the appointed trustee holds property, which can be real property, money, shares or any other asset. These assets are merely held by the trustee on trust for the beneficiaries of the Trust.
The trustee has the power, amongst other powers, to make investments and lease property for the trust. Additionally, the trustee has the discretion to distribute any capital or income of the trust to the beneficiaries.
As the trust is discretionary, this means that the Trustee has discretion as to whom or how much they distribute to a beneficiary. For example, there may be two named beneficiaries, but this does not mean that the income must be distributed equally, instead the trustee may choose to distribute more to one than the other, or only to one of them.
The trustee may also be restricted to distribute to only a certain “class of beneficiary”, this is not a named beneficiary, but a class within the trust deed that dictates what counts as a beneficiary. For example, The Discretionary Trust Deed of the Adams Family may have a clause stating that all members of the family, whether by blood or marriage, are entitled to benefit from the trust. This does not directly name the beneficiaries specifically and leaves it open to any new or old members of a family to be a beneficiary.
Common Issues in Discretionary trusts
Appointors (sometimes called Guardians/Custodians) – the appointor is the person named in the deed who usually has the ability to remove the trustee of the Trust and to appoint a new Trustee. We have often reviewed a trust deed which does not allow for the original appointor to change the who is the appointor. Not having a mechanism to replace the appointor can pose serious issues for the trust and can be very costly to resolve. If you wish to have the appointor or the appointor clause amended, please contact our office.
Vesting Day – this is the day which the trust ends . It cannot be any more than 80 years from the day of establishment. Some trusts that have a shorter vesting date such as 20 or 30 years from the establishment of the Trust.
When the trust vests, there should be a procedure in the trust that outlines what must be done to properly wind up the trust. The trustee will be required to determine the trust’s assets, discharge any liabilities, make final distribution, and verifying the trust accounts and making statements available to the beneficiaries.
Not being careful and diligent about the vesting day will have tax implications. The vesting date cannot be changed after the date has passed, if the vesting date has passed, then you will need to create a new trust. If you require the vesting day of your trust to be varied or require advice on the vesting date, please contact our office.
Restrictive Class Beneficiaries Clauses – although it sometimes beneficial to put in a “class of beneficiaries” clause, it is paramount that you understand that a clause may be too specific and therefore the beneficiaries may not be who you actually wish, or there may be little room for the trustee to exercise their discretion in distribution. If you wish to have very specific distribution clauses made that are also future-proofed or if you wish to vary or amend your existing clause/s, please contact our office.
If you have any further enquiries about discretionary trusts, wish us to review your discretionary trust or wish to understand how it works, please contact our office at (03) 9707 1155.