In order to maximise the benefits available in utilising a discretionary trust it is necessary to fully understand the nature of the trust, the role of the parties involved and the capabilities of the trust in order to maximise protection of assets and minimise taxation consequences.

The How a Discretionary Trust Works Kit is designed to help understand the structure of the trust and the role of the parties involved while providing assistance to maximise the benefits available under the trust.

Below is an outline of the matters addressed.

What is a Trust?

A trust is a relationship where a person (the Trustee) is under an obligation to hold property for the benefit of other persons (the Beneficiaries). The terms of the obligation are defined by the terms of the Trust Deed entered into between the Trustee and the Settlor.

A trust is not a separate legal entity even though a trust tax return will be required to be lodged with the Australian Taxation Office each year. The Trustee is the legal owner of the trust property and the beneficiaries hold the beneficial interest in the trust property.

What is a Discretionary Trust?

In a discretionary trust the beneficiaries do not have a fixed entitlement or interest in the trust funds. The trustee has the discretion to determine which of the beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive. The trustee does not have a complete discretion. The trustee can only distribute to beneficiaries within a nominated class as set out in the terms of the trust deed.

What are the elements of a Discretionary Trust?

In determining how a discretionary trust works the role of each of the six elements of a discretionary trust should be known. The role of the six elements may be summarised as follows:

The Trustee

The trustee is the legal owner of the trust property although not the beneficial owner. The trustee carries out all transactions of the trust in its own name and must sign all documents for and on behalf of the trust. The trustee’s overriding duty is to obey the terms of the trust deed and to act in the best interests of the beneficiaries.

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