How a Discretionary (Family) Trust works

Cassandra Townsend, Lawyer

We've recently received a number of customer queries about how a family trust works and how to set up a family trust through Cleardocs.

A family trust is a type of discretionary trust generally set up to hold a family's assets or conduct a family business. A family trust structure can assist in providing asset protection and certain tax advantages.

Information on family trusts and family trust elections are available on our website.

Below are some common customer queries about family trusts:

1.     Can the sole trustee of the discretionary (family) trust also be the sole beneficiary?

2.     Can a trust be a beneficiary under a family trust?

The Cleardocs Discretionary Trust deed is only suitable if you wish to name individuals, local companies or incorporated associations as beneficiaries. Maddocks does not recommend that trustees be named beneficiaries because distributions from one trust to another may raise issues in relation to the rule against perpetuities.

3.     Can I update the deed of my discretionary trust?

Yes, however Cleardocs does not have a product to update the deed of a Discretionary Trust. If you wish to amend your discretionary (family) trust, you should engage a lawyer to draft the changes. The lawyer will need to ensure the changes do not trigger the creation of a new trust and that the relevant variation process described in the deed is followed.

4.     Is the Cleardocs Discretionary Trust compliant with the Bamford ruling and/or change to laws regarding streaming provisions for trusts?

Yes.

o    The deed contains an appropriate definition of income - since 13 December 2004, Cleardocs deeds adopt a definition equivalent to taxable income ("net income" under taxation law).

o    The deed contains a specific power for the trustee to determine whether receipts are to be treated as on account of capital or income. All Cleardocs deeds since Cleardocs launched in 2002 provide this discretion.

o    The deed contains a specific power for the trustee to determine whether to adopt an alternate definition of income in respect of a year of income by signing a minute to that effect (or taking some other action). Again, this feature was introduced into Cleardocs deeds in December 2004.

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New SMSF Borrowing rules

Danni Kirwan, Marketing Executive

On 7 June 2010, changes were made to the law on borrowing through Self Managed Superannuation funds (SMSFs). If you are considering borrowing through your SMSF, or are already in the process of preparing to borrow, these changes may affect you.

All Cleardocs documents are up to date. As always the changes were developed and signed-off by our lawyers at Maddocks.

So what are the changes?

Most noticeably, the name for SMSF Borrowing arrangements has changed from “Instalment Warrant Borrowing arrangements” to “Limited Recourse Borrowing arrangements”. Other key changes are:

· The borrowed money can also be used by the SMSF to pay borrowing related expenses including stamp duty, conveyancing fees and loan establishment costs. Under the old arrangement, it wasn’t clear if funds could be used for these sorts of expenses.

· The SMSF can refinance its borrowing.

· The SMSF can use the borrowed money to purchase a ‘single acquirable asset’, which can include a collection of shares in a company or a collection of units in a unit trust – so long as the shares or units acquired are of the same class with the same market value.

These changes are expected to be welcomed by SMSF Trustees, as they provide greater clarity than the previous rules as well as, generally, more flexibility.

How do the changes affect the Cleardocs documents?

The Cleardocs SMSF borrowing packages and SMSF deed were updated, on the advice of Maddocks, on Friday 9 July in accordance with the law changes.

If you haven’t yet started the borrowing process, then:

· Any new SMSFs set up are capable of Limited Recourse Borrowing

· To purchase an SMSF Borrowing package from Cleardocs, the SMSF needs to have a deed that was created or updated on or after 9 July 2010.

If you’ve paid Cleardocs for your SMSF Borrowing documents but the loan has not yet started, then you need an updated version of the Cleardocs documents, please call us on 1300 307 343 and we will arrange the new documents for you for free.

If your SMSF borrowing is already in place, then you don’t need to do anything about the documents. They are fine as they are.

What do you think about the changes?

We’d love to hear your thoughts on the SMSF Borrowing changes. Do you think the new rules help to clarify the SMSF Borrowing process? You can leave your comments below.

Need more information?

For a more comprehensive review of the changes, Maddocks have prepared the following ClearLaw articles on the topic:

Super fund borrowing rules: proposed new laws making things clearer

SMSF Borrowing: Cleardocs documents updated to reflect changes in the law

Related Cleardocs Documents

Self Managed Superannuation Fund (SMSF) set up $137.50

Update to SMSF $99.00

SMSF Borrowing (bank) $198.00

SMSF Borrowing (related party) $599.50

Cleardocs Breakfast Seminars - SMSF Borrowing

Danni Kirwan, Marketing Executive

Earlier this week, Cleardocs hosted seminars in Melbourne and Sydney focusing on SMSF borrowing through instalment warrant arrangements. We’ll be posting a video of the seminar on the Cleardocs website in mid August.

We organized the seminars in response to the large number of queries we were getting on our helpline about our new SMSF borrowing products.

The Seminars were presented by Julian Smith, a partner at Maddocks. Some of you may have spoken to Julian over the years on our legal helpline, or seen him present at our previous seminars; Fiona Da Silva from St George Bank in Melbourne, and Wayne Scott from NAB in Sydney.

We had a great turnout from Cleardocs customers keen to find out more about this relatively new opportunity. Our audience proved quite inquisitive, challenging Julian, Fiona and Wayne with some tricky questions — you can see it all on the video.

The banks gave a great insight into their restrictions and considerations for instalment warrant borrowing, and pointed out some of the things commonly overlooked. Did you know:

• that a property held under an instalment warrant arrangement can’t be used to secure an overdraft? And
• that an arrangement using funds borrowed through an instalment warrant can’t be refinanced? Though Julian did outline an innovative solution he arranged with a bank for one client.

One of the points Julian, Fiona and Wayne all made was to allow plenty of time to set up the arrangement – they suggested it takes 6 to 8 weeks for the banks to process an instalment warrant application. So keep that in mind if you’re planning to settle on a property!

For those of you unable to attend the seminars, we’ll be posting a video of the seminar on the Cleardocs website in the coming weeks. In the meantime, you can find more information on SMSF borrowing in our previous blog posts, and ClearLaw articles written by our lawyers at Maddocks.

It was great to meet some of our customers face to face at the seminars after talking to so many of you on our helpline. Seminars are also a great way for us to keep you informed about products and issues that are relevant to you.

If you have any questions about SMSF borrowing, or about any of our other products, let us know in the comments section below, and we’ll get back to you. We’d also love to hear about any ideas you might have for future seminar topics. Or, if you were at the Seminar, we’d love to know what you thought.