DISCRETIONARY TRUST FAQ

DISCRETIONARY TRUST FAQ

 1.                   What is a Discretionary Trust?

         An arrangement set up by Deed of Settlement (a Trust Deed) that permits a Trustee to hold assets for a beneficiary (or beneficiaries) and to distribute income and capital between the beneficiaries as and when the Trustee exercising a discretion decides.

2.            How is a Trustee changed?

The existing Trustee must resign or be removed.  The resignation can be verbal or in writing (in writing is preferable) however the Trust Deed usually dictates the required method.  If there is more than one Trustee, the notice, whether verbal or in writing, is given to the other Trustees.  If there is only one Trustee then the notice is given to the Nominated beneficiaries.

A Trustee can be removed by the Appointor. Depending upon the wording of the Deed, either the retiring Trustee appoints a new Trustee or the Appointor appoints a new Trustee.  The appointment should be in writing, preferably by Deed and should be signed by the new Trustee and incorporate an undertaking by the new Trustee to act as Trustee and discharge the duties of a Trustee set out in the Deed and at law.

Most Discretionary Trust Deeds provide that it is the Appointor that has the power to remove an existing Trustee and appoint a new Trustee.      

Most Deeds provide that the Appointor is the person who removes a Trustee and appoints a new Trustee however:

  • If there is no Appointor then a Trustee (either the retiring Trustee or a continuing Trustee has the power to appoint a new Trustee.
  • If the Trustee has died then the deceased Trustee’s Executor (Legal Personal Representative) has the power to appoint.
  • If the Trustee or Legal Personal Representative fail or refuse to appoint then the Nominated Beneficiaries can appoint.

It is important for Trustees in NSW to be mindful that if there is a change of Trustee then the Trust Deed must provide or be amended to provide (before the new appointment is made) that neither the retiring Trustee or the new Trustee can ever be beneficiaries of the Trust.

This is because under NSW Stamp Duty Law, if the retiring Trustee can become a beneficiary because of the retirement, then Stamp Duty is charged as if the assets of the Trust had been transferred to the Trustee.

 

 3.            How is a new Trustee added?

Depending upon the wording of the Trust Deed, it is either the Trustee or the Appointor who has the authority to add a new Trustee.  The appointment can be verbal or in writing (in writing is preferable). Generally the appointment is in the form of a Deed.  The additional Trustee must, when accepting the appointment, undertake to carry out the duties of Trustee and discharge the obligations contained in the Trust Deed and at law.

4.            How do you remove a Beneficiary?

This depends entirely upon the wording of the Deed.  Most Deeds provide that there are two ways of removing a beneficiary:

a)      The beneficiary by document in writing renounces his or her interest as a beneficiary (a Renunciation may be required if the change is made in conjunction with a Centrelink Declaration); or

b)     The Trustee makes a Declaration that henceforth a particular beneficiary will no longer be a beneficiary.

The Trustee should carefully study the Deed to make sure that the Trustee has that power.  The Trustee should be very careful when removing a beneficiary not to create a re-settlement.

5.            What is the minimum amount of a settled sum?

Any amount however small can be the settled sum.  It can be as low as $1.00, commonly it is $10.00 or $100.00.  What a Trustee must be ever vigilant for is to ensure that the settled sum is properly receipted into the funds of the Trust and accounted for throughout the life of the Trust.  This is because if the settled sum is never paid to the Trustee as the seed capital of the Trust then the Trust never comes into existence.

6.            Who are the additional Beneficiaries?

The additional or General Beneficiaries are beneficiaries who fall within a very general description of beneficiaries.  They are usually in some general way related or associated (often quite distantly) to the Nominated Beneficiaries.  They may include Companies, Trusts, Superannuation Funds and the like in which a Nominated or other General Beneficiary has an interest.

A Charity can be a General Beneficiary.

7.            How is the name of a Deed changed?

It is not possible to change the name of a Deed.  However, it is possible to change the name of a Trust.  The Trustee elects to change the name of the Trust and then confirms that election in writing.  A Trustee must ensure that if a Trust changes its name that every person who has business dealings with the Trust and every Nominated Beneficiary of the Trust is notified of the change of name.

 8.            Does a Trust have to have a Trustee?

Yes every Trust must have a Trustee.  This is because the law requires that for a trust to exist there must firstly be some trust property and secondly, it is the Trustee (or Trustees) who hold the trust property on trust for a beneficiary or beneficiaries.  There must be a separation between the legal and equitable ownership.

9.                     How is the State of Jurisdiction of a Trust changed?

The State of jurisdiction of a Trust is determined by where the Trust conducts its business.  As soon as a Trust (the Trust is made up of the Trust assets) is moved from one State to the other then the jurisdiction of the Trust moves to the new State.  Trustees must be aware that if a Trust is moved from one State to another stamp duty must be paid in the new State (in some States within one month of the Trust assets coming into the State and in other States within three months).

10.                 How is a Trust wound up?

A Trustee winds up a Trust by:

a)      making a Declaration (in writing) that the Trust is to vest (that is the Trust is to end and the Trust assets are to be distributed to the beneficiaries);

b)     collecting all of the Trust assets and converting them into cash, (unless the Trustee proposes to make an in specie distribution);

c)      all debts of the Trust must be paid, including tax;

d)     if the Trust is a Discretionary Trust, the Trustee must exercise a discretion and determine who among all the beneficiaries is to receive the Trust assets; 

e)     the assets (or cash) are then distributed;

f)       notice must be given to the Taxation Department that the Trust has ceased to exist

11.                 Can a sole personal Trustee be a Sole Nominated Beneficiary?

No, because there must be a difference between the legal person who is the Trustee and the legal person who is the beneficiary to enable a Trust to exist. 

However it can validly be argued that in all Discretionary Trusts, because there are General Beneficiaries as well as Nominated Beneficiaries, the answer is they can be.

It is however normal for ALL Banks to refuse to lend to a Trust where the Trustee is one and the same as the sole Nominated Beneficiary.

12.        Can the Settlor be a Beneficiary?

No, for two reasons:

a)      Section 102 of the Income Tax Assessment Act 1936 provides that if the person who establishes a Trust (the Settlor) has the power to terminate a Trust then the Trust will be deemed not to exist and the Settlor will be personally taxed on the whole of the Trust income;

b)     If the Settlor is a beneficiary then the Settlor will not have divested him/herself of the Trust assets and as a consequence no Trust relationship can exist.

13.        If a Beneficiary of a Trust is itself a Trust, who is to be named as the Beneficiary?

The Trustee of the beneficiary Trust, “as trustee for” the Trust.

14.        Who can be the Trustee of a Discretionary Trust?

Any individual, company, or incorporated association can be a Trustee provided that the person or directors are not bankrupt, infants, or disqualified persons.

15.        What address should be shown for Trustees and Beneficiaries?

Any address that will enable the Trustee and beneficiary to be identified.

It will not be long until beneficiaries will be required under Anti Money Laundering Legislation to provide their dates of birth and tax file numbers.

16.        Must the Trustee have an Australian address?

Yes, since the address of the Trustee determines the legal jurisdiction applicable to the Trust.

17.        Can a Settlor be changed?

No, the sole function of a Settlor is to establish the Trust.  Once established and the settled sum has been paid to the Trustee, the Settlor has no further involvement with the Trust.

18.        Can a beneficiary be added to a Discretionary Trust?

Yes, but the definition of beneficiary in most Discretionary Trusts is very broad so it may not ever be necessary to add a beneficiary and if a beneficiary that could not be contemplated under the wide definition is added, then the addition will likely create a re-settlement with potential Capital Gains Tax and Stamp Duty implications.

19.        How long does a Trust last?

A Trust must vest (be wound up and its assets distributed) within 80 years of being set up.  Most deeds provide for the Trust to have a maximum life of 79 years.  A Trust can be wound up at any time within the 79 years.