The use of Discretionary Trusts in estate planning

Rosemary Carreras

Discretionary Trusts (often referred to as family trusts because they are typically used to distribute income amongst family members) are probably the most widely used type of trust structure.

An appropriately implemented Discretionary Trust promotes:

• Asset protection benefits
• Estate and succession planning benefits
• Tax efficiency.

A common and sensible objective for anyone making a Will is to ensure that each beneficiary’s inheritance is protected and preserved from:
• Waste and dissipation of the assets by the beneficiary
• Claims on the beneficiary’s assets due to marital or commercial problems.

Discretionary Trusts are being used more and more in estate planning to protect inherited wealth by the incorporation of ‘Testamentary Trusts’ in a person’s Will.    

It is a misconception that “The best estate plan is to own nothing but have access to everything." The reason is that progressive changes in family and bankruptcy law, and the wide reaching power of the Family Court to dismantle trusts and bind third parties such as trustees, means that the protection offered by a Discretionary Trust (whether it be created ‘inter vivos’, that is, during a person’s lifetime or in a Will as a Testamentary Trust) is not absolute.

The primary reasons for the creation of Discretionary Trusts are to enable the primary asset holder to distance himself or herself from legal ownership of either capital (for risk management purposes) or income (for tax purposes). Recent case law suggests that if a person controls a Discretionary Trust - in the sense that they have unfettered power to appoint a trustee and/or distribute, irrespective of whether to themselves or others as beneficiaries, these reasons are negated because courts can regard that power as giving the controller the very property rights the discretionary trust was set up to negate.

So do we abandon this age old planning tool? I do not believe we should as discretionary trusts continue to be an effective form of asset protection if appropriately implemented.

You can read more about Testamentary Trusts and how they can help protect your assets by reading our Plain English Guide to Testamentary Discretionary Trusts. Learn more about estate planning by reading our Plain English Guide to Estate Planning.

Be sure to have your Trust Deed and/or Will prepared and regularly reviewed by a solicitor with expertise in trust and estate law. For more information please contact: 

Rosemary Carreras, Senior Associate
Phone: +61 9898 9277
Email: rcarreras@colemangreig.com.au