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Trusts
Trusts document

Discretionary (Family) Trust

Use Cleardocs to create all the documents you need to set up a Discretionary Trust (also known as a Family Trust). Cleardocs can also arrange your trust's ABN, TFN and GST registrations. In a Discretionary Trust, the trustee has discretion to pay beneficiaries any amount of the trust income or capital that the trustee believes is appropriate.

Cleardocs also has these trust set up packages available:

$156.75
  • Cleardocs fee incl GST $156.75
Product Benefits
  • Bamford case compliant
  • Extensive online help and local phone support
  • Easy to use question interface
  • Full range of tailored discretionary (family) trust set up documents
  • Simple process for ABN, TFN & GST applications
  • Register the corporate trustee of your discretionary trust through Cleardocs
  • Change the trustee of your discretionary trust through Cleardocs
  • Copy function for address details
  • Stamping service for trusts executed in Victoria
Product Information

What documents are included in the Cleardocs package?

The Discretionary (Family) Trust package includes:

What information do you need to order a Discretionary (Family) Trust through Cleardocs?

You can download our checklist of the information required to order a Discretionary (Family) Trust package.

What is a "Family Trust" in Australia?

The term family trust refers to a discretionary trust set up to hold a family's assets or to conduct a family business.

An Australian family trust:

  • is generally established by a family member for the benefit of members of the 'family group';
  • can be the subject of a family trust election which provides it with certain tax advantages, provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are within the 'family group';
  • can assist in protecting the family group's assets from the liabilities of one or more of the family members (for instance, in the event of a family member's bankruptcy or insolvency);
  • provides a mechanism to pass family assets to future generations; and
  • can provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax "tax-free thresholds".

A family trust has many other potential benefits, including avoiding issues such as challenges to the will following a death of a senior member of the family.

The Discretionary Trust Deed

The terms and conditions under which a discretionary (family) trust is established and maintained are set out in its deed.

The trust is established by the trust's settlor and trustee (or trustees) signing the trust deed, and the settlor giving the trust property (the "settled sum") to the trustee.

Cleardocs Discretionary Trust Deeds purchased in or after 2004 are compliant with the High Court's decision in Bamford's case and related ATO rulings.

Information about the settlor

The settlor's function is to give the assets to the trustee to hold for the benefit of the trust's beneficiaries on the terms and conditions set out in the trust deed. The settlor executes the trust deed and then, generally, has no further involvement in the trust.

The settlor of a Discretionary Trust must be an independent person. That person, or his or her spouse or children, cannot be beneficiaries of the trust and should not be trustees. A settlor will often be a family friend or a solicitor or an accountant who will not be a beneficiary or a trustee.

Information about the trustee

The trustee is responsible for the trust and its assets. The trustee has broad powers to conduct the trust, and manage its assets. The trustee can be a corporation or individuals.

In a discretionary (family) trust, the trustees are usually Mum and Dad (or a company of which Mum and Dad are the shareholders and directors). Their children and any other dependants are usually listed as beneficiaries.

Trust income — distributions and income tax

The Cleardocs Discretionary (Family) Trust is a trust under which the trust's trustee or trustees may distribute trust income or other trust property:

  • among the beneficiaries named in the schedule to the trust deed, or
  • to any one or more people who fit within the description of the general class of beneficiaries which is also set out in the schedule.

The distributions of trust income or other trust property may be made to any number of these eligible beneficiaries and in any proportion at the trustees' complete discretion.

If you require a trust in which the beneficiaries have a fixed interest in the income or other trust property, then you must seek legal advice. Please contact us so we may refer you to Maddocks who can provide you with a free estimate of fees for drafting a deed to suit your needs.

A trust does not have to pay income tax on income that is distributed to the beneficiaries, but does have to pay tax on undistributed income. The trustee is free to distribute trust income to as many beneficiaries as possible, and in proportions that take best advantage of those beneficiaries' personal marginal tax rates. The beneficiaries then pay the tax on distributions made to them.

For example, if an adult beneficiary of the trust only receives income from a trust and has the benefit of the tax-free threshold for the year, the trustee could distribute part of the family trust's income to this person. The result is that the beneficiary will receive some income but may not have to pay tax if that amount is less than the tax-free threshold. If the distribution to the beneficiary exceeds his or her tax-free threshold, the excess amount will be taxed at the beneficiary's personal marginal tax rate.

Distributions received from a trust are not a special form of income, but instead form part of a beneficiary's assessable income. If the beneficiary receives income from other sources in addition to distributions from the trust, all of the income will be taxed together.

Even if the beneficiary's income does exceed the tax-free threshold for a particular year, the rate of tax applied to the amount of the excess income over the tax-free threshold may be lower than for other beneficiaries because of the total income that these other beneficiaries already receive.

The trustee should also take care in relation to which beneficiaries are chosen to receive distributions, as penalty tax rates can apply to distributions made to minors.

Discretionary (Family) Trust elections — a word from the ATO on income distributions

One important aspect of a discretionary (family) trust that must be kept in mind is to whom the distributions are made.

First, all distributions must be made only to people who qualify under the terms of the trust deed to be beneficiaries of the trust.

Secondly, for trusts that have made a family trust election, the distributions may only be made to beneficiaries who are within 'the family group'. In relation to this the ATO states on its website:

A consequence of making a family trust election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy.
From ATO's website

In other words, if a discretionary (family) trust makes a family trust election and then pays out to someone not a member of the family group, they will be taxed at the maximum rate possible! Be warned.

Cleardocs Discretionary Trust Minutes Package — keeping proper records

Cleardocs offers a range of meeting minutes and resolutions for administration of your Discretionary (Family) Trust. Your Trust then has unlimited use of the Discretionary Trust Minutes Package for 12 months.

If you purchase your Trust's 12 months unlimited use of the Discretionary Trust Minutes Package when you set up your Discretionary (Family) Trust through Cleardocs, you will receive a 15% discount on the package.

Cleardocs stamping service — Victoria

Cleardocs offers a stamping service for deeds executed in Victoria. You can select the option for Cleardocs to duty stamp your trust deeds with the State Revenue Office Victoria on your behalf when you set up your trust.

Seek legal advice

The Discretionary (Family) Trust information here should be considered general in nature, and in no way interpreted as legal advice. You must always seek your own independent legal, accounting and financial advice about your particular situation. The summary on this page is for information purposes only.

Frequently Asked Legal Questions

Cleardocs is not a law firm. So as with all the legal material on this site, the answers to these "frequently asked legal questions" are provided by the law firm Maddocks. Cleardocs does not endorse those answers.

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Why can't a sole trustee be a sole beneficiary?

The sole trustee cannot be the sole beneficiary because a trust is a legal relationship between a trustee and the beneficiary or beneficiaries.

If a sole trustee were also the sole beneficiary, then this would be an agreement that a person had with themselves. The law says that no trust can exist in these circumstances.

However, a trustee can be a beneficiary of the trust as long as there is at least one other beneficiary as well.

Can an estate be named as a beneficiary?

No. A person's estate does not exist until a person dies. So an estate cannot be named as a beneficiary as an estate is not a person.

Can the trustee distribute to an estate if the beneficiary is deceased?

Yes, if a beneficiary dies then the trustee may make a distribution to the beneficiary's estate - the Cleardocs discretionary trust deed has 2 requirements to allow for this:

  1. There must be a testamentary trust in the deceased beneficiary's will; and
  2. The relevant beneficiaries of the discretionary trust must also be beneficiaries of the testamentary trust in the will.

Can I name a charitable entity as a beneficiary?

Yes, you can name a charitable entity as a beneficiary - but you must be specific (or else the trust might be void for uncertainty). You need to decide exactly who you wish to benefit and in what capacity they are acting (eg: company, trustee etc.) so you can specifically name the body that will benefit from the trust.

For example, you can't just name 'the green movement' as the beneficiary. You need to name the entity precisely, for example: "World Wide Fund for Nature Australia".

Can a trust be a beneficiary under the discretionary trust?

No (but see next 2 questions). A trust cannot be a beneficiary under a discretionary trust because the law says a trust is not a separate legal person. For example, the 'John Smith Family Trust' cannot be named as a beneficiary of another trust.

Even so, the trustee of a trust, in his, her or its capacity as trustee, is capable of being a beneficiary of a trust - see next question.

Can a trustee be a beneficiary under a discretionary trust?

Yes, the law allows a trustee to be a beneficiary of a trust - as long as you include the trustee's name and their capacity. For example:

'John Smith in his capacity as the trustee of the John Smith Family Trust'.

In this case, the trustee is effectively a beneficiary of the discretionary trust for the beneficiaries of the trustee's own trust.

The Cleardocs Discretionary Trust deed is only suitable if you wish to name individuals, companies or incorporated associations as beneficiaries. Maddocks does not recommend that trustees be named beneficiaries of a discretionary trust as distributions from one trust to another trust may raise a number of issues.

(The trust itself cannot be named as a beneficiary as it is not a legal entity.).

Can a corporate trustee be a beneficiary?

Yes, a corporate trustee can be the beneficiary of the trust - as long as you include the trustee's name and their capacity. For example:

'ABC Pty Ltd in its capacity as the trustee of the ABC Family Trust'.

In this case, the trustee is effectively a beneficiary of the discretionary trust for the beneficiaries of the trustee's own trust.

The Cleardocs Discretionary Trust deed is only suitable if you wish to name individuals, companies or incorporated associations as beneficiaries. Maddocks does not recommend that trustees be named beneficiaries of a discretionary trust as distributions from one trust to another trust may raise a number of issues.

(The trust itself cannot be named as a beneficiary as it is not a legal entity.)

Can I have 2 corporate trustees?

Yes, you can appoint 2 companies to act jointly as trustees of a trust. However, experience shows that having more than one corporate trustee makes administering the trust much more complicated.

Why can't a beneficiary transfer their "interest" under a discretionary trust to someone else?

A beneficiary can't transfer their "interest" under a discretionary trust to someone else because until the trustee resolves to make a distribution in favour of that beneficiary, (or any beneficiary) that beneficiary's "interest" isn't a real "interest" or "right". Instead, it is what the law calls a "mere expectancy" - which can't be transferred.

How will distributions to a beneficiary who resides overseas be taxed?

A foreign resident who has paid tax on a distribution in Australia may also have to pay income tax again in their own country. However, Australia has "double taxation treaties" with many other countries to ensure that tax is effectively paid in only one of the countries.

Maddocks can give you advice on double taxation treaties.

Does the Settlor have to reside in Australia?

No, the settlor does not need to reside in Australia. However, the settlor must be present when the trust deed is settled because he/she is responsible for the trust property becoming vested in the trustee.

Does the settled sum have to be transferred into a bank account or can it be settled with cash?

It is preferable to transfer the settled sum into a bank account. However, the settled sum does not have to be transferred into a bank account.

As long as the settled sum is kept separate from the other property of the trustee, it is acceptable to either:

  1. Staple banknotes for the settled sum to the trust deed, or
  2. Keep the cash "on trust".

Does a Cleardocs trust give me asset protection?

A trust can play an important role in an asset protection strategy.

However, if you are concerned about asset protection, then you should seek legal advice about your particular circumstances.

When should the trustee apply for an ABN for the trust?

ABNs are not compulsory. However, there are many good reasons to have one - for example, ABNs help:

  1. You to deal with the ATO; and
  2. You in dealing with other businesses when supplying goods or services to them, or when purchasing goods and services.

Also, you need an ABN to register for GST. Entities carrying on an enterprise in Australia with a GST turnover of $75,000 must register for GST.

More information can be found at www.abr.gov.au.

Will the trust be entitled to an ABN?

A trust must meet either one of the following 2 criteria to be eligible for an ABN:

Criterion 1

The entity is any one of:

  1. A company incorporated under the Corporations Act 2001 in Australia;
  2. A charitable institution or trustee of a charitable fund in Australia;
  3. A deductible gift recipient in Australia; or
  4. A religious institution in Australia.

Criterion 2

The entity can answer 'Yes' to each of the following statements:

1. Its activity is carried out in any of:
1.1 the form of a business
1.2 the nature of trade, or
1.3 the form of a regular or continuous grant of a lease, licence or interest in property.
2. Its activity is carried out in Australia or it makes supplies that are connected with Australia.
3. Its activity is not a private recreational pursuit or hobby.

What do I do if my bank won't give me finance because "the trust deed doesn't allow it"?

If a bank says it won't give you finance because the trust deed won't allow it, there are 3 steps you can take:

  1. Inform the bank that under both the 'Overriding general powers', and 'Specific powers' clauses, the trustee has very broad powers, which include the power to apply for and obtain finance; and
  2. If this doesn't work, ask the bank what amendments to the Deed they require. Then instruct a lawyer to draft the amendments.

Most issues of this nature can be adequately and promptly addressed in this way.

What do I do if the discretionary trust deed is lost?

You can't simply replace a discretionary trust deed because to do so is likely to create a new trust - which has tax and stamp duty implications.

So, if a discretionary trust deed has been lost, then you need to consider the following steps in consultation with a lawyer:

  1. Arrange for all parties to the deed to conduct a thorough search for the deed;
  2. Contact the person (maybe a solicitor or accountant, or their firm) who arranged the deed to see if they have a copy;
  3. Ask the person (maybe a solicitor or accountant, or their firm) who arranged the deed if they have a deed which they arranged around the same time as your lost deed was arranged;
  4. Seek advice from your lawyer as to whether you can use a similar deed to replace the lost Deed; and
  5. If none of the above options are available, then the trustee can approach the relevant state or territory court and apply for directions on how to administer the trust.

Does the Cleardocs Discretionary Trust deed allow for a church as a beneficiary?

The Cleardocs Discretionary Trust deed allows for distributions to churches as eligible beneficiaries:

  • if the church is a charity; or
  • if the church is a legal entity and the trustee exercises its power to nominate the church as a beneficiary of the trust (for the purpose of receiving distributions).

If you have an existing discretionary trust, then the trustee may exercise its power to nominate a church or churches as an additional class of eligible beneficiaries. The trustee should first seek legal advice on potential resettlement issues before exercising the power.

If you have not yet established the discretionary trust you may wish to add a church or churches as a class of eligible beneficiaries before executing the deed. Maddocks can provide you with a quote to prepare an appropriate amendment.

I want to change the trustee of my discretionary trust from an individual to a corporate trustee. I have not yet incorporated the company to act as trustee. What do I do?

You can create a company through Cleardocs using the Company Registration package. Once you have registered the company it can be appointed as trustee of the trust. You will need to see a solicitor to draft a Deed of Appointment and Resignation. This document officially appoints the new company as trustee of your trust and records the outgoing individual trustee's resignation.

Maddocks can provide you with a quote to prepare these documents. Please call us to arrange a quote from Maddocks.

When naming beneficiaries of a discretionary trust (the first trust), can I name a trustee in their trustee capacity (the second trust)?

Yes, it is possible to name a trustee (in their trustee capacity) as the beneficiary of a discretionary trust, but you need to be careful and to seek professional advice.

You need to be careful because trust income from the first trust may automatically be distributed to the second trust — and if the second trust does not distribute that income, then the income may be assessed in the second trustee's hands (at the highest marginal rate).

A discretionary trust's named beneficiaries are often the 'default beneficiaries' — this is the case in the Cleardocs Discretionary Trust Deed. This means that if, in respect of a financial year, the trustee does not make a decision to distribute trust income then the income is automatically distributed to the named beneficiaries in equal proportions. This is so that the trust income is not assessed in the trustee's hands.

The dangers with the scenario outlined in the question above are:

  • that the first trust's income might be assessed in the hands of the second trustee at the highest marginal rate. This could occur if the second trust does not have a default beneficiary/automatic distribution mechanism.
  • if the second trustee has carefully planned how the second trust's income is to be distributed and in what proportions — the 'unknowing' receipt of the first trust's income may upset that planning (whether or not there is a default beneficiary/automatic distribution mechanism).

A useful alternative to the scenario outlined in the question above is to ensure the second trust fits within the class of general beneficiaries of the first trust — for example, by ensuring a named beneficiary of the first trust, is also a named beneficiary of the second trust. Then:

  • the first trustee can distribute income to the second trustee as a general beneficiary; and
  • the second trustee can be notified and take that income into account when planning for its own year-end distributions.

The law of South Australia governs my trust. Why does the trust vesting date remain as the perpetuity period given South Australia no longer has a rule against perpetuities?

The Cleardocs discretionary trust deed has been drafted so that in every State and Territory of Australia, the trust vesting date will be the end of the perpetuity period (i.e. 80 years after creation of the trust) or earlier if the trustee decides.

Although the rule against perpetuities has been abolished in South Australia (meaning the trust could vest later than 80 years after establishment), Cleardocs has decided to keep the trust vesting date for these trusts as no later than the perpetuity period. This is because issues can arise where the trust has trust assets in various jurisdictions throughout Australia notwithstanding the trust is governed by the jurisdiction of South Australia.


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