Trusts & Superfunds
A Family Discretionary Trust
What is a Family Discretionary Trust?
A family discretionary trust is an arrangement where assets are held by one or more individuals (or a company) with the intention that the benefit of the assets will be transferred to other specified individuals on the terms spelt out in a document called the trust deed.
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a trust deed - which contains all of the rules by which the trust must be operated;
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a settlor - who provides the initial sum of money to start the trust, and then has no other role;
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a trustee - being one or more individuals or a company, who are to hold the trust assets in their name, invest them or otherwise earn income on them, arrange the preparation of annual tax returns and, after consulting the trust deed (and probably their accountant), decide to make distributions of income and/or capital;
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the trust assets - which are the amounts of money, properties, shares, investments, chattels, etc which represent the wealth of the trust;
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the beneficiaries - who are the people, companies, charities and perhaps trusts for whom the trust assets are held by the trustee and to whom the benefit of the trust assets can be transferred as permitted by the trust deed;
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the appointor - is the most powerful person in the trust, whose only job is to hire and fire trustees (as permitted by the trust deed).
What are the Components of a Family Discretionary Trust?
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There must be a trust deed.
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It will have a trustee, trust assets, beneficiaries and an appointor.
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It must have its own separate bank account, TFN and may need an ABN.
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There must be a book of minutes recording the decisions of the trustee.
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It should have an accountant and financial advisor.
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The trust assets which are used to generate the income of the trust.
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A memorandum of wishes which is your way of letting future trustees know how you would like the trust to operate after your death.
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A deed of appointment or a provision in your will specifying a successor appointor.
Why Would I Want a Family Discretionary Trust?
- Asset protection - the creditors of beneficiaries generally cannot have access to trust assets for payment of beneficiaries’ debts. If a beneficiary is being sued in a divorce situation then the spouse may have trouble convincing the judge to use estate assets to settle their claim for a division of matrimonial property (however the trust may be regarded as a financial resource of the beneficiary).
- Tax effectiveness - being a discretionary trust the trustee will have a discretion as to which beneficiaries receive income, and in what proportions. The income of the trust is taxed in the hands of the beneficiaries who receive it. This means that the trustee may be able to direct income to the members of your family that have the lowest incomes, and by that means the trust income distributed to them should be taxed at their lower marginal tax rates.
- Control - eventually you will die or become too frail to manage your assets. Trust assets will not form part of your estate, but if you have a corporate trustee then any shares that you hold in the corporate trustee can be gifted in your will. This allows you to pass control of the trust to those of your family who will be good money managers and, as long as they are of good character, they can use that control to assist those of your family that are not good money managers. If you have family members who are spendthrifts, have gambling addiction, have substance abuse issues, mental health issues, overbearing spouses or partners, or friends who will prey on them or easily defraud them, or otherwise likely to be bankrupted, then you will keep control of your family discretionary trust out of their hands while still have them receive the benefits.
- Estate planning - can be achieved by way of your family discretionary trust however there are limitations. As the trust assets are not yours to give away, either during your lifetime or by way of your will, you can have some influence on the management of your trust after you die by making a memorandum of wishes. This is a document in which you indicate to future trustees of the trust what is to happen to the income and capital of the trust. You must keep in mind however that the trustees are bound to comply with the terms of the trust deed and therefore the contents of any memorandum of wishes you leave behind will not be legally enforceable. Therefore to achieve the outcome you require you need to put in place strategies that will pass the role of trustees and appointor to people who you are confident will comply with your wishes.
Links:-
http://www.findlaw.com.au/articles/4606/what-is-a-discretionary-trust-and-what-are-the-ben.aspx
A Self-Managed Super Fund and Death Benefit Nominations
What Are They?
- A self-managed super fund is a special type of trust that is set up specifically for saving for your retirement that complies with the superannuation laws.
- A death benefit nomination is a document you can sign under the rules of your SMSF forcing the trustee of the SMSF to pay your superannuation assets on your death as you wish. Nominations can be binding or non-binding, and lapsing or non-lapsing.
What are the Elements of a Self-Managed Super Fund?
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A Trustee or Trustees - are the individual or individuals (which generally must be the members of the fund) or a private company (whose shareholders and directors generally must be members of the super fund) that manage the fund.
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A Super Fund Deed - is the document which (together with the superannuation legislation) provides the rules by which your super fund will operate.
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The Super Fund’s Assets - is the money and other property which are transferred into the fund by the members and held and invested by the trustee.
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A Written Investment Strategy - is the document outlining the types of investments that can be made with the super fund assets.
Members of the fund - are you and your family members who transfer assets into the fund where they are recorded in the respective members’ accounts.
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The fund should have an accountant and financial advisor.
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The fund must be registered with the Australian Taxation Office.
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Death Benefit Nominations - are documents in which you can remove the super fund trustee’s discretion as to who is to receive your super fund assets when you die by specifying exactly to whom they are to be paid and in what amounts.
Why Would I Want It?
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An SMSF should provide you with a very tax effective way of saving for your retirement.
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An SMSF may give you a way of leaving a very tax effective pension for your spouse or financial dependents when you die.
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An SMSF allows you to manage your own superannuation assets or obtain the advice from your own preferred experts as to how those assets should be managed.
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An SMSF may deliver savings in the costs of management and compliance.
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An SMSF is another tool for you to use in your estate plan, particularly when you make non-lapsing, binding death benefit nominations.
Links:- https://www.ato.gov.au/Super/Self-managed-super-funds/
http://www.chan-naylor.com.au/asset-protection-discretionary-trust/#FeaturesBenefits