Legal Tip 104: Structuring a Discretionary Trust Part 1

Continuing my series of articles on structuring, this time we will focus on trusts. Trusts are complex legal structures which can be confusing for most people – even most lawyers do not really understand the concept.


A trust is not a separate legal entity but it is a relationship. A trustee will own property on behalf of the members of the trust. These members can be beneficiaries of a discretionary trust, unit holders of a unit trust or members of a SMSF.


It is therefore very important to consider the structure of the trustee. Broadly there are 3 common ways that are the most common trustees:

1. Individual

2. 2 individuals (often spouses)

3. A company

Since a trust is not a separate legal entity the trustee will own the trust assets. So Dad acting as trustee for the Smith Family Trust will own the bank account, any real property owned by the trust and any shares owned by the trust. This poses 2 main problems.

a. It may be difficult to determine which property dad owns in his own right and which property he owns as trustee for the trust.

b. Dad will be personally liable for any debts of the trust.

There is also a 3rd problem often over looked:

c. Dad resigns as trustee or dies – title has to be changed for all trust property.

Two individuals acting as trustee results in all the above issues, but also another is that both trustees will occupy a single office so they must work as one. If they cannot agree then they cannot make a decision. If 3 trustees then 2 cannot override the 3rd for example.


For these reasons (and others) a company is preferred to act as trustee. The company should not be trading and its only activity will be acting as trustee. So there can be no doubt that all the property owned by the company will be owned in its capacity as trustee. Death of the director won’t necessitate the changing of the title to property because the company will survive the death of the individual(s) behind it. Death of director will mean a new director comes in and can continue to operate the company. If there are 2 or 3 persons behind the company acting as directors they need not agree on all decisions (this will vary depending on how the company is set up). The company itself, as a legal person will be making the decisions.


The most important aspect of the company is that it limits liability. A company is a separate legal person to its members. Shareholders cannot be liable for the company debts (unless they personally guarantee company debts). A director is also not liable for the debts of the company or trust, unless they have contravened laws such as causing the company to trade while insolvent or breaching OH&S laws etc or unless they have given personal guarantees.

 

Terry
Correct me if I am wrong but some, esspecially govt, bodies dont recognise trusts. eg - landgate in WA. Therefore on the title only the trustee is listed (not the trust). The only way to know the property is held in trust is via the O&A.
Unlike the ATO which does recognise trusts as their own entity, and have laws/rules applied directly to them.

Blacky

 

I believe its OK if only the trustee appears - as long as its documented what capacity they were acting in.

 

A trust is not a legal entity so cannot enter contracts. It is just a relationship.

 

In QLD Land Titles there is no requirement to disclose that someone is acting in their capacity as trustee, so it can just be the trustee on the title. However, if you disclose that they are acting as trustee then you need to deposit the trust deed (if there is one) with titles. This will need to be a certified copy, after which the title will read

Xyz Pty Ltd as trustee under instrument 70253256. If you then pull an image of that instrument number (in reality called a dealing number) you can see a full copy of the trust deed.

I would normally recommend that you don't declare the trust relationship, but unfortunately your lender may have other ideas so you need to check with them first.

 

In Nsw there is no notification of the trust when registering title.

 

We have the most trouble with NSW lender's (inc the big ones) compliance teams who, even though you don't need to register there (or here) can't cope unless the transfer documents have "under instrument ????" on them.

 

That is interesting, I have never encountered that, but I rarely do conveyancing. So someone can get a copy of the transfer and then work out if a NSW is possibly owned by a trustee.

 

In Vic, it's the same (ie just the Trustee registered). I don't believe the titles office holds copies of the trust deed either.

 

I am looking at setting up a Discretionary (family) Trust at the moment (NSW).

If a company acts as the trustee does that mean GST is payable on purchases and profits are subject to the flat company tax rate?

I was also concerned about being able to obtain finance using a company for two reasons: 1) Will I have to obtain a commercial loan at a higher interest rate? and 2) If the company has no assets/income is finance going to be difficult to obtain?

I wanted myself, my wife and 4 children (aged 2, 4, 6 and 8) in the trust, is that possible?

 

The trustee has no relevance at all to the type or amount of taxes paid

1 & 2) No, it's based on your personal stuff still

 

1. No and No.
2. 1. no and 2. no
3. If you mean be beneficiaries then yes it is possible.

 

Thanks Terry and D.T.

Are there any downsides to having a company as the trustee?

I would like to use the trust to ensure my children receive equal shares when the time comes for them to take over and to also spread the future tax liability across the trust beneficiaries.

 

Yes - the corporations Act

If that is the case you seriously may need to rethink.

 

What are the issues around equal shares and tax liability? These are the reasons why a discretionary trust was recommended to me.

 

Discretionary trusts don't have any fixed entitlements. there is are no shares as it is discretionary in nature. whoever controls the trust controls the capital and income.

Who recommended a DT?

 

My accountant recommended it (he is also a family friend and executor of my will).

My brother in-law has 3 children and uses it for tax minimisation.

 

You are correct in respect of landgate only recording only the name of the trustee and not the trust on the CT. you will need to have the O & A or other such document like a declaration of trust to evidence who is the actual beneficial owner of the property.

 

Trust advice can only come from lawyers as this is legal advice. The tax agent can only advise on the tax aspects.

 

BTW, children can only ear $416 per year before they are taxed at 66%.