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The term family trust is used to describe a certain type of discretionary trust which generally includes beneficiaries who are all related to each other.
What is a Trust?
The term of a trust is a legal entity where a person (Trustee) holds property and assets for the benefit of either a Beneficiary or a group of beneficiaries (Beneficiaries). The terms of the trust are important and a Trust Deed needs to be entered into between a Settlor and the Trustee to govern the relationship.
The term discretionary trust or family trust is a type of trust where the Trustee holds the income and assets of the trust on discretion for the Beneficiaries. This is distinct from a fixed trust where the Beneficiaries entitlement to the income and assets of the trust are at fixed.
The Benefits of a Discretionary Trust
There are a variety of benefits for a Discretionary Trust these include:
- Distributions can be made to other family members;
- Children are entitled to the family’s money without the parents losing control over the assets;
- A way for property to be retained within a family;
- protection against creditors;
- a tax effective structure.
The roles in a Discretionary Trust/Family Trust
There are generally four distinct roles within a discretionary trust. It is useful to understand these roles as it is vital that the correct person is assigned to these roles to ensure that the trust complies with the legal requirements. These are:
- The Trustee
The Trustee is the legal owner of the trust property. This is distinct from the beneficial ownership of the property. The Trustee has the day to day control over the management of the trust and is under an obligation to ensure that they do not place themself in a position of conflict between the interests of the trust and their personal interests.
The Trust Deed will set out a number of powers that the Trustee is entitled to exercise, usually, these are all the powers that an individual can exercise, but it is important that a Trust Deed is properly drafted to ensure that the Trustee has the proper powers under the Trust.
- The Settlor
To establish the trust, consideration must be paid. It is important that the Settlor pay the initial sum of money to settle the trust and the Settlor must not derive any benefit from the trust and therefore cannot be a beneficiary under the trust. The Settlor does not have any obligation under the trust other than paying a sum to create the trust and executing the Trust Deed.
- The Beneficiaries
The Beneficiaries are the people and entities that can have a mere expectancy to benefit from the income of the trust and are entitled to the capital of the trust. However, the Beneficiaries do not have an interest in the assets of the trust other than those benefits provided to them upon the Trustee exercising his/her powers under the Trust Deed. It is at the Trustees discretion to decide which Beneficiary receives the income of the trust.
In a family trust, the beneficiaries are ordinarily all of the members of a family including any company or trust that a beneficiary is related to. This gives the Trustee a broad discretion to distribute trust property to a variety of entities.
- The Appointor
The Appointor is the person with the real control of the Trust. The Appointor has the power to remove and appoint a new trustee at their discretion. The Appointor will generally also have the power to add new classes of Beneficiaries to the Trust, however, this power should be used with great caution as it can have taxation consequences.
The Trust Deed
As stated above the Trust Deed sets out the terms of the relationship between the Trustee and the Beneficiaries. We have extensive experience in drafting discretionary family trusts to be able to properly advise clients of the necessary structures and the tax ramifications involved in setting up this type of structure. It is important that you engage a competent lawyer to draft the Trust Deed to ensure that your rights and obligations are properly catered for.