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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What do you need to know?

Lisa Galbraith, CEO

As an online provider of legal documents, we take a broad range of questions from our customers – from people setting up their own businesses and super funds etc., from advisers, and from adviser’s support staff.

Often these questions are very specific to the caller’s situation and require the expert advice provided by our legal partner, Maddocks or other legal experts. But some questions are very broad. What is interesting about these calls is that they show both:

• that people are trying to become more informed about business, tax and legal structures; and
• that the material available is not addressing their needs or starts at the wrong level — that is, it assumes a level of knowledge that the person doesn’t have.

Helping to educate and inform our customers is a key priority for us. We are not looking to replace the legal expert, or other advisor, but we are trying to help people feel more informed so they can ask better questions. For example, as a reader of our website you are alerted that:

• if you work in a support role in an advisor firm, we regularly update our help and FAQ based on the questions that other support people are asking and we provide information that helps you understand what the adviser you are helping is trying to achieve, and how it all fits together for your firm’s client; and
• if you are an adviser, then you are alerted to innovations in the options available and to the legal developments relevant to your clients’ decisions.
• if you are the end client, then you can ask your financial planner: Does the SMSF deed you are recommending allow me to borrow? What option does the deed provide for death benefit arrangements? Why are you recommending a particular approach? ;

Better informed people make better decisions and are likely to manage structures better.

So what is Cleardocs doing?

Internally, we have been exploring how we can be more effective in playing an “educative” role —to our professional customers, to their support staff, and to people ordering documents for themselves.

The challenge has been to select the best ideas. Look out for changes in the coming months. For example:

• We are consolidating the vast amount of user “help” text, “FAQ” type of information, and newsletter articles, so that it’s quicker and easier for you to find and use;
• For our monthly newsletter ClearLaw, we have asked Maddocks to include articles that are more general in nature. For example, in February you may have noticed Part 1 of an article comparing the different trust structures – what are the benefits and things to be wary of when choosing a discretionary trust Vs a unit trust (both fixed and non fixed) Vs hybrid trust. Based on the feedback we have received, I’m sure Part 2 will be keenly read.
• We are linking more to the ATO, ASIC and other government bodies which provide an excellent source of information.
• We are exploring different mediums for providing information – video, webcasts etc.

Get involved

As we roll out these changes, please let us know what articles you find, or would find helpful. We’ll see how we can help. Drop us an email at support@cleardocs.com we would love to hear your thoughts.