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Discretionary Trust Deeds

Whenever you are considering an appropriate business, personal, or investment structure for your clients, there are a number of issues and criteria to be considered.  These include:

  • The protection of existing and future assets from financial misadventure;
  • Taxation flexibility - income tax, CGT, payroll tax, stamp duty and GST;
  • Control of the structure;
  • Capacity to cope with entry and exit from the structure.

The risk of losing assets usually arises from the activities of the person holding the interest in the asset, particularly if the person is involved in a business.

We believe that flexibility is one of the most important attributes of any business structure.  A flexible structure will more often than not lead to better asset protection and better taxation/revenue results.  The most flexible structure is a fully discretionary trust.

Why Use a Cleary Hoare Trust Deed

Not all trust deeds can achieve the level of asset protection and flexibility described here.  The provisions included in the trust deed have a significant impact on the asset protection outcome.

The Cleary Hoare Discretionary Trust Deed is not just another standard trust deed.  It provides additional benefits, including:

  • It is fully discretionary.  This means it has no default provisions creating default interests in income or capital.
  • It includes control provisions which provide for the maximum number of alternatives for changing the control of the trust.  These are particularly relevant for implementing strategies for estate and succession planning.
  • The Deed specifically allows for income to be determined either in accordance with income tax law under Section 95 of the Income Tax Assessment Act 1936 (Cth) or in accordance with ordinary income concepts (Commissioner of Taxation v Bamford [2010] HCA 10).
  • It provides powers to stream tax credits (such as franking credits) and capital gains to different beneficiaries.
  • It allows for discretionary accumulation of income and maximum flexibility for interim distributions of capital.
  • It provides for a maximum range of income and capital beneficiaries including related companies, trusts and other entities. 

If you want to create a Discretionary Trust, please click HERE to download our Instruction Sheet. 

If you would like any further information on the Cleary Hoare Discretionary Trust, please contact Cleary Hoare directly to speak to one of our specialist Solicitors.

Using Discretionary Trusts

Fully Discretionary Trusts can be used for:

  • Asset protection during a client’s lifetime;
  • To quarantine personal assets from business risk;
  • To protect business assets from mishaps of the business;
  • Estate planning to protect assets from challenges to a Will.

Personal assets, interests in a partnership owned by individuals, units in a unit trust or shares in a company owned personally are exposed to risk of loss should there be an attack on the individual.  This may arise from litigation, divorce or bankruptcy.  The risk of loss could be as a result of an order being made by the Family Court, the Trustee in Bankruptcy taking control of the assets, or creditors enforcing a judgment against the owner.

With a fully Discretionary Trust, a beneficiary does not own, or have an interest in, the property held in the trust.  They merely have a right to be considered when the trustee decides to make a distribution from the trust.  Control of a trust does not mean ownership of trust assets.  Australian Courts have consistently confirmed this principle.  If protection from future family law claims is sought, specific advice is required to ensure that control and beneficiaries are structured appropriately for the circumstances.

Using Trusts in Estate Planning

The key issues in effective estate planning are asset protection and passing on control of assets either in a Will or during a client’s lifetime.

Assets can be protected in the hands of the next generation by including a fully Discretionary Trust for each child in a Will ("Testamentary Trusts").  The assets pass to these trusts when the Testator dies.  Each child would ‘control’ or share control of their own trust and hence the assets they inherit.  The assets are ‘owned’ by the trust rather than the individual, and will be protected from a claim against the individual by unsecured creditors and can provide significant protection from claims by ex-spouses of a beneficiary.

Using fully discretionary trusts, assets can safely pass through several generations without disturbing the ownership.

In addition to the asset protection benefits, Testamentary Trusts also provide significant taxation benefits.

Using Trusts During a Client's Lifetime

A client may wish to implement asset protection strategies during their lifetime due to their desire to:

  • Quarantine personal assets from business risk (especially in light of faltering insurance cover);
  • Protect assets against a challenge to a Will; and
  • Protect pre-marriage assets.

The desired protection is more easily achieved if the assets are not ‘owned’ by the client either personally, in partnership, as a unitholder in a unit trust or as a shareholder of a company.  This can be achieved by transferring the assets to a Discretionary Trust now.

If Stamp Duty and CGT are too great a hurdle for major assets to be transferred to a trust now, there are often solutions available through Cleary Hoare that can also achieve the desired level of asset protection.

Using Trusts in Business

Operating a business as an individual, sole trader, partnership, or company provides little asset protection or taxation flexibility.  Again, fully discretionary trusts provide the greatest flexibility.

Where a Discretionary Trust undertakes a business activity, it is preferable to quarantine any personal or investment assets from the operation of the business.  This can be achieved by creating a Trading Trust to operate the business and a separate Discretionary Trust to hold investment assets.  This structure protects the assets from an attack from unsecured creditors of the business, or a third party "out of left field" claims. 

The Cleary Hoare Bloodline® Trust

The Cleary Hoare Bloodline® Trust is a special type of Discretionary Trust which creates an extra level of asset protection over a standard Discretionary Trust.  The Bloodline® Trust ensures that the capital/assets in the trust cannot be distributed to anyone outside a specified bloodline eg children or grandchildren.  In-laws can receive (discretionary) income from the trust but not the capital/assets.

Bloodline® Trusts are particularly valuable for use in estate planning and other asset protection strategies.  They can be testamentary trusts or activated now.

The Bloodline® Trust is not available via the on-line document system.  If you would like further information about the Bloodline® Trust please contact Cleary Hoare directly to speak to one of the specialist Solicitors.