What to Know When Reviewing Discretionary Trusts

A discretionary trust, which may also be referred to as a family trust, is a trust arrangement where assets are held and managed by a trustee for the benefit of a defined class of beneficiaries. The trustee has the discretion to decide how and when to distribute income or capital from the trust to the beneficiaries.

Whenever laws, tax rules and family circumstances change, it is important to review a discretionary trust and make any changes if need be. Doing so can be overwhelming, however, so here I have provided some factors to be aware of when the time to review comes around.

Changes in Tax Law

Tax law, particularly as it applies to trusts, is subject to frequent legislative changes and ATO interpretations. Rules around trust streaming, distributions to minors under section 98 of the Income Tax Assessment Act 1936, and Division 7A of the Income Tax Assessment Act 1936 regarding private company loans and payments are subject to frequent legislative and administrative changes. Regularly monitoring these changes, understanding how they affect your trust and updating your trust when necessary will prevent any unexpected tax liabilities.

Review Your Appointor

Contrary to popular belief, a trustee does not hold all the power in a discretionary trust; the appointor typically has significant control through their power to appoint and remove trustees. While the trustee is the legal owner and manager of the trust’s assets, they may be removed and replaced by the appointor in accordance with the trust deed. If a trustee dies, resigns from their position or becomes bankrupt, the appointor decides who replaces them (although you can have a trustee succession plan). Since your appointor is so important, the position needs to be reviewed to ensure that the person, including any appointor succession plans, still reflect your interests.

Change Your Beneficiaries

If your mind or circumstances change, it is possible to change beneficiaries or add a new one. However, it must be carefully considered. Any amendment to the beneficiaries must be made in accordance with the trust deed’s variation powers and may require consultation with relevant stakeholders to ensure that doing so is in the best interests of the beneficiaries. Also importantly, amendments to beneficiaries may constitute a trust resettlement under Australian taxation law, potentially triggering capital gains tax events and stamp duty obligations. Professional advice should be sought before making such changes.

Since a discretionary trust is so complicated, any changes can have effects in areas that you did not originally expect. Just like with Wills and Powers of Attorney, discretionary trusts should be reviewed regularly, preferably annually or when significant legal or circumstantial changes occur, to ensure compliance with current laws and to minimise potential disputes.

If you have any questions about reviewing your discretionary trust, please do not hesitate to contact me. I am here to help.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.