Discretionary Trusts for Property Investment – Roles & Functions

Discretionary Trusts for Property Investment – Roles & Functions

Trusts are widely used for investment and business purposes.

– A Trust is a relationship between parties in which we can separate the legal and beneficial ownership of assets. This relationship is defined in the ‘Trust Deed’ dictating what are the terms of the relationship.
– Different from a Company, it is not a separate legal entity so will not function in the same way. As it is not a separate legal entity, the trust assets will be legally owned by the trustees (non-beneficially – for the benefit of the trust rather than in their own capacity). This is the reason why when we enter contracts the naming convention could be ‘Trustee Company Pty Ltd ATF Holding Family Trust’.
– For tax purposes trusts are treated as taxpayer entities for purposes of tax administration.

Trustees
Trustees are the legal owners of the property held by trust and are also responsible for the administration of the trust following the terms set in the trust deed.
Trustees can be either a company or an individual/s.

Beneficiaries
Beneficiaries are the one who are entitled to income or capital as per the clauses of trust deed. They can be in the form of person, company, or another trust.

Following are the main roles within Trust:
1. Settlor – Settlor can be anyone (friend or accountant) but cannot be the Trustee or Beneficiary and should be an independent person. He/she is responsible for payment of settlement sum at the time of creation of Trust. Once settlement sum is paid by the settlor and deed has been executed then they will have no other role.
2. Appointor – Appointor controls the trust and has power to appoint or remove a trustee. In short, Appointor is in the person with ultimate control.
3. Trustee– Trustee is responsible for managing the trust and are responsible to look after the funds and distributing to the beneficiaries at the end of financial year. They are also liable for the debts of the trust they administer but at the same time enjoys right of being indemnified from the assets of the trust where proper exercise of the trustee’s powers has been administered.
4. Beneficiaries – May have an entitlement to trust income or capital that is set out in the trust deed or they may acquire an entitlement because the trustee exercises a discretion to pay them income or capital.

Discretionary Trusts – Commonly used for property investment

A discretionary trust is used in a way where income is able to be distributed at the trustee discretion, which can change from year to year. In this form of trust, a standard company is created to act as a trustee and family members becomes directors of that company. There are some advantages attached to company as a trustee.
– Asset Protection – The legal owner of the assets is actually the trustee company rather than held individually
– Tax Minimisation – Trust distributions are taxed in the hands of the beneficiary so tax optimisation can be achieved by paying benefits out to family members on lower marginal tax rates
– Borrowing Capacity – The advantage of this is in some circumstances, the trusts borrowing may not impact your individual borrowing capacity as loans taken are directly with the trust and not the individual. The individuals controlling the trust will most likely play the role of guarantor for the loan initially
– Land Tax – In certain states discretionary trusts have its own land tax free threshold separate to the individual threshold, which could be advantageous

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