Discretionary Trust Deeds for Family Trusts - Aren't they all the same?

Family trusts play a vital role in managing wealth and succession planning, yet the importance of the trust deed, and ensuring that it operates effectively, is sometimes overlooked.  While sometimes regarded as uniform in nature, in reality, not all family trust deeds are identical and the differences between trust deeds can have significant legal and financial consequences. 

Accordingly, it is imperative to have a deed that fulfils the objectives of the trust, that trustees (and their advisors) can easily understand, and one that promotes clarity of their rights and obligations.

This article highlights some important features of Cleardocs’ products relating to the establishment, and variation, of family trust deeds which:

• advisors can easily understand when making trust distributions, reducing the confusion that often contributes to invalid distributions;
• are suitable for the objectives and relevant circumstances of the trust, including in respect of excluding certain classes of beneficiaries, such as:
  • Non-blood relatives (using the Direct Lineal Relatives product); and
  • Foreign persons (using the Family Trust Product, Deed of Variation or Direct Lineal Relatives product); and
• use plain English and clear language, are up to date with current laws, regularly reviewed for compliance (as is the case with Cleardocs deeds).

Family Trusts and Trust Deeds

A family trust is a type of discretionary trust used to hold family assets or run a family business. These trusts offer a range of benefits:

• Asset protection – shielding family wealth from individual liabilities and bankruptcy proceedings.
• Succession and estate planning – helping pass assets smoothly to future generations and reducing the risk of disputes over wills after a family member’s death.
• Tax efficiency – allowing income to be distributed across family members to make use of tax-free thresholds.

The trust deed is the legal backbone of the trust. It sets out the rules for how the trust is run, who benefits, and what powers the trustee has. A clear, well-drafted deed is essential to ensure the trust works as intended.

Who Can Benefit from a Family Trust – And Who Can’t?

In a family trust, beneficiaries are the people or entities eligible to receive distributions of income or capital from the trust. Cleardocs trust deeds clearly define both named beneficiaries and eligible classes of beneficiaries, giving trustees and advisors clarity and confidence when making decisions.

However, there are situations where it may be necessary or desirable to exclude certain individuals from benefiting - such as non-blood relatives, foreign persons, or others whose inclusion could trigger tax issues or conflict with the trust’s objectives.

Cleardocs offers tailored deed options, including the Direct Lineal Relatives and Family Trust products, to help trustees and their advisors manage these exclusions effectively and in line with legal requirements.

Excluding non-blood relatives

Some families want to ensure that trust assets stay strictly within the bloodline - especially across generations. This approach aims to preserve family legacy, protect assets from external claims, and avoid unintended beneficiaries gaining access to trust distributions.

The Cleardocs Discretionary Trust - Direct Lineal Relatives product is designed for this purpose. It limits distributions to individuals who are blood relatives of the named beneficiaries, excluding others such as spouses, in-laws, or relatives of a spouse. This helps preserve the original intent of the trust and protect family wealth from being diluted or redirected.

While the deed defines a narrow class of beneficiaries, trustees retain flexibility to nominate additional classes - provided they have a strong connection to existing beneficiaries. For long-term control, this trust structure should be paired with robust estate planning.

Excluding foreign persons

Trusts that hold property can face significant additional taxes if any beneficiary is considered a foreign person - even if they never receive a distribution. In all Australian jurisdictions, surcharge land tax or stamp duty surcharges may apply where the trust deed permits (or may permit) distributions to foreign beneficiaries.

To avoid this, the trust deed must irrevocably exclude foreign persons and prevent future amendments that could allow them to benefit. These restrictions are especially important to understand for modern family groups, where overseas connections are common: if these provisions are included, then it may prevent any distributions to overseas members of the family group who may otherwise stand to benefit.

Cleardocs offers the following product solutions to help families and their advisors manage this risk:

• Discretionary (Family) Trust – A broad and flexible trust with the option to include clauses that exclude foreign persons. Ideal for families who want flexibility but also need to manage potential tax risks.
• Discretionary Trust - Direct Lineal Relatives – Automatically limits beneficiaries to blood relatives and includes the option to exclude foreign persons. Great for families wanting to keep wealth in the bloodline and avoid foreign person surcharges.
• Discretionary Trust - Deed of Variation (Excluding Foreign Persons) – Allows existing trust deeds to be updated to exclude foreign persons from receiving income or capital, helping trusts stay compliant and tax-efficient.

If you're unsure which Cleardocs trust product is right for your situation, you should discuss  with your professional advisor before making a purchase.

Excluding additional beneficiaries

In addition to the specific exclusions set out above, the trustee also has an express power under the Cleardocs discretionary trust deed to exclude any particular category of the 'classes of eligible beneficiaries' set out in the schedule to the deed.

Using Tax Laws Effectively – Bamford and Forrest cases

The Bamford[1] decision confirmed that trustees have flexibility to define what counts as "income" in a trust deed. This can be useful for tax planning, allowing trustees to treat certain receipts as income or capital depending on the circumstances. However, the Forrest[2] case serves as a caution: if the deed isn’t drafted clearly, the trustee’s power may be interpreted narrowly- as merely administrative - limiting its usefulness.

Cleardocs trust deeds are drafted with both Bamford and Forrest in mind. They give trustees a clear and unconfined discretion to adopt an alternative definition of income for any financial year- not just an administrative power. This means trustees can make informed decisions about how income is treated, with confidence that the deed supports their discretion. This flexibility is built into both the Discretionary (Family) Trust and Discretionary Trust - Direct Lineal Relatives products, helping families manage income distributions in line with tax law and avoid unintended consequences.

Why ‘plain language’ matters in Trust Deeds

The Mercanti[3] case illustrates how confusing legal language can lead to costly disputes. The issue came down to the meaning of a single word - “hereinbefore” - and whether it allowed the trustee to change the appointor by varying the deed’s schedule. The court ultimately ruled in favour of the trustee, but the case shows how unclear drafting can cause uncertainty and that even a single ambiguous word can create confusion and risk.

Cleardocs trust deeds are written in plain English, making them easier for trustees, advisors, and family members to understand. This reduces the chance of misinterpretation and helps ensure the trust operates as intended. By avoiding legal jargon, and removing ambiguity, Cleardocs deeds reduce the risk of misinterpretation and legal challenges - making them a practical choice for anyone involved in managing or advising on trusts.

What can go wrong with your deed – invalid distributions

Trust distributions must be made in line with the trust deed. If trustees or advisors misunderstand the deed or make distributions without properly following its terms, the consequences can be serious—such as the income being taxed at the highest marginal rate.

This issue was highlighted in the BRK case, where the trustee made distributions to companies that weren’t properly nominated under the deed. The court found the distributions invalid, and because the trustee hadn’t correctly exercised its discretion, the income wasn’t distributed to any beneficiary. As a result, the trustee was taxed on the full amount at the top rate.

Cleardocs trust deeds are designed to avoid these kinds of mistakes. They include clear provisions that state: if the trustee doesn’t exercise its discretion to accumulate income by 11:59 pm on 30 June, the income will automatically be held for beneficiaries under the default distribution clause. This ensures that income is properly dealt with - even if the trustee fails to act - reducing the risk of invalid distributions and unexpected tax bills.

Conclusion

Understanding the purpose of your trust and choosing the right deed is essential to ensuring it works as intended - whether that’s protecting family wealth, managing tax outcomes, or planning for succession. Trust deeds vary widely, and small differences in wording can lead to big legal or financial consequences. Cleardocs offers a range of trust deed options that are legally reviewed, written in plain English, and designed to help trustees and advisors avoid common pitfalls. If you're unsure which structure suits your needs, it's always wise to seek professional advice before proceeding.

More information from Maddocks

For more information please contact Maddocks in Melbourne (03 9288 0555) and ask for a member of the Commercial Team.

More Cleardocs information on related topics

• Bend it like Bendel: How should trustees navigate the ATO’s interim decision impact statement?
• Deeds of Variation and Deeds of Rectification: what is the difference and which should I use?
• What is the appropriate governing law jurisdiction for my Trust Deed
• Be careful when varying a trust deed for a trust that holds property! A change in ‘beneficial ownership’ may result in transfer duty
• Family Trusts and end-of-year distributions - Revisiting the benefits of the 'Bucket Company' structure

Order Cleardocs discretionary trust packages

• Discretionary (Family) Trust
• Discretionary Trust – Direct Lineal Relatives
• Discretionary Trust - deed of variation (excluding foreign persons)
• Change of Trustee Discretionary Trust
• Discretionary (Family) Trust Minutes & Resolutions

[1] Commissioner of Taxation v Bamford [2010] HCA 10.

[2] Forrest v Commissioner of Taxation [2010] FCAFC 6.

[3] Mercanti v Mercanti [2016] WASCA 206