Firstly, what is a Trust?
A trust is a relationship where a person or corporation (the Trustee) is under an obligation to hold property for the benefit of other persons (the Beneficiaries). The terms of the obligation are defined by the Trust Deed. The Trustee is the legal owner of the trust property and the beneficiaries hold the beneficial interest in the trust property.
What then is a Discretionary Trust?
A discretionary trust (or family trust as it is more often referred to) does not give the beneficiaries a fixed entitlement or interest in the trust assets. The trustee has the discretionary to determine what beneficiaries are entitled to the income and capital and how much each is to received.
Why use a Discretionary Trust?
As the name suggests, a discretionary trust allows the trustee discretion in determining each year, which beneficiary receives income from the trust. This has clear benefits where there is a disparity in the income of the beneficiaries and allows for the gift of income at reduced tax rates to those on lower income tax brackets.
As a general rule, trusts are a tax effective structure for holding investments such as real estate and other fixed assets. This is because distribution of capital gains from a trust to individual beneficiaries qualifies for the 50% CGT discount, this is not available to companies.
The other main benefit of a Discretionary Trust is asset protection. A Trustee of a discretionary trust holds the property beneficially for the beneficiaries. Property held by a person as trustee cannot be taken by a creditor in bankruptcy, unless the debt relating to the creditor was a trust debt.