Written by:
Joel Simmonds
Head of Advice
A discretionary trust is one of the most flexible and commonly used trust structures in Australia, offering significant benefits for both individuals and businesses. If you’re looking to manage wealth, protect your assets, or plan your estate, a discretionary trust can be a powerful tool.
But what exactly is a discretionary trust, and how does it work? Whether you’re considering setting one up for the first time or just want to understand its advantages, it’s important to know how these trusts operate and the potential tax benefits they offer.
In this guide, we’ll break down the key features of a discretionary trust, explain how it differs from other trust structures (like fixed and unit trusts), and explore why so many Australians choose this option for both personal and business purposes.
By the end, you’ll have a clear understanding of whether a discretionary trust might be the right solution for your financial or estate planning needs.
A discretionary trust (sometimes referred to as a discretionary family trust) is a type of trust where the trustee has the power to decide how the income or capital of the trust is distributed among the beneficiaries.
This makes it more flexible compared to a fixed trust, where the beneficiaries have set entitlements.
The flexibility of a discretionary trust can be a key benefit when used for tax planning and asset protection. For those looking for control over how their wealth is passed on, this structure offers a clear advantage.
People set up discretionary trusts for a range of reasons, including:
Here’s a quick breakdown of how a discretionary trust operates:
Unlike a fixed trust, where beneficiaries have a set share of the income or assets, a discretionary trust allows the trustee to distribute income as they see fit.
This flexibility is one of the main reasons discretionary family trusts are so popular in Australia, especially when compared to unit trusts or fixed trusts.
In a unit trust, the beneficiaries (or unit holders) have fixed entitlements, which limits the flexibility in distributing income compared to a discretionary trust. You can learn more about the differences between unit trust vs discretionary trust to determine what might work best for your situation.
No, a discretionary trust does not have to be a family trust.
While many family discretionary trusts in Australia are structured as discretionary trusts, the two terms are not the same.
A discretionary trust refers to any trust where the trustee has the flexibility to decide how income and assets are distributed among the beneficiaries. The beneficiaries in a discretionary trust do not have to be family members—it could be set up for business partners, investors, or other groups, like in the case of a discretionary trading trust.
A family trust, on the other hand, is a type of discretionary trust specifically designed to manage and protect family assets. It’s commonly used for estate planning, tax planning, and ensuring wealth is passed down to future generations.
So, while a family trust is usually a discretionary trust, not all discretionary trusts are family trusts. If you’re looking to manage assets specifically for family members, a family trust might be the right choice for you.
Want to learn more about family trusts? Read our detailed article on family trusts here to explore how they can protect your family’s wealth and benefit future generations.
A discretionary trust might be the right choice if:
Setting up a discretionary trust in Australia involves several steps:
It’s advisable to work with a professional accountant or legal expert to ensure the trust is set up correctly and in compliance with Australian laws. This is especially true if you’re considering a discretionary trading trust or discretionary services management trust for business purposes.
The tax advantages of a discretionary trust are significant.
The trustee can distribute income to beneficiaries who are in lower tax brackets, reducing the overall tax burden.
However, it’s important to remember that income retained within the trust is taxed at the highest marginal rate.
If you’ve decided that a discretionary trust is right for you, here’s how to go about setting one up in Australia. The process involves a few important steps:
Choose a Trustee: Decide whether you will appoint an individual, a group of people, or a corporate entity as the trustee. The trustee will be responsible for managing the trust’s assets and making decisions on how to distribute income and capital.
Draft a Trust Deed: This is a legal document that outlines how the discretionary trust will operate, including the roles of the trustee and beneficiaries. The deed should specify the powers of the trustee, the rules for distributing income, and any special provisions. Ensure the trust deed clearly defines the discretionary nature of the trust.
Appoint the Beneficiaries: Beneficiaries are the people or entities that can benefit from the trust. In a discretionary trust, these beneficiaries don’t have a fixed right to receive income or assets, as the trustee has discretion over distributions.
Settle the Trust: The trust is created when the settlor, the person establishing the trust, makes a nominal contribution (often around $10) to the trust. The settlor should not be a trustee or beneficiary to avoid conflicts of interest.
Register the Trust: You will need to apply for a Tax File Number (TFN) for the trust to manage its tax obligations. If the trust will generate income, you’ll also need an Australian Business Number (ABN).
Open a Bank Account: Open a bank account in the trust’s name to manage trust funds. All transactions should be conducted through this account to maintain transparency and separation from personal finances.
Consult Professionals: It’s recommended that you seek advice from a qualified accountant or lawyer throughout this process to ensure the trust is set up properly and in accordance with Australian laws. This is especially important if the trust will involve complex assets or business interests.
Setting up a discretionary trust can be a powerful way to manage wealth, protect assets, and plan for the future.
Whether you’re looking to reduce your tax obligations, secure your family’s assets, or streamline your estate planning, a discretionary trust offers flexibility and control.
Whether you’re considering a family trust, discretionary trust, or unit trust, we can guide you through the setup process and tailor the trust to your specific needs.
Let’s get started today. Reach out for a no-obligation consultation, and we’ll work with you to make the best decision for your financial future.
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Here’s some of the most commonly asked questions about discretionary trusts.
If your question isn’t answered below, please feel free to get in touch. We’re always happy to help.
A discretionary trust is primarily used for asset protection and tax planning.
It allows for flexible income distribution, which can be beneficial for families or businesses wanting to manage their wealth efficiently.
Assets in a discretionary trust are owned by the trust itself, not by individual beneficiaries.
This can protect the assets from creditors or legal claims against the beneficiaries.
Yes, a discretionary trading trust can be used for business purposes.
The trust can own and operate a business while providing the benefits of asset protection and flexible income distribution.
In a discretionary trust, the trustee has the flexibility to distribute income as they see fit.
In a unit trust, beneficiaries (or unit holders) have fixed entitlements to the income or assets.
Setting up a discretionary trust involves drafting a discretionary trust deed, appointing a trustee, settling the trust, and registering it with the ATO.
It’s best to seek professional advice to ensure the trust is structured properly.
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This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.
General Advice Warning – The information contained in this article is of a general nature and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decisions regarding any products or strategies mentioned in this publication.
Disclaimer – While all care has been taken in the preparation of this blog, to the maximum extent permitted by law, no warranty is given in respect of the information provided and accordingly, neither Direct Wealth nor its related bodies corporate, employees or agents shall be liable for any loss suffered arising from reliance on this information.
