Legal Tip 263: Is a Discretionary Trust the Same as a Family Trust?

Discussion in 'Legal Issues' started by Terry_w, 11th Jan, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends.

    Often the a ‘family trust’ is used to refer to a discretionary trust set up for a family group. In these situations, they are the same thing.

    But under Schedule 2F of ITAA36 there is a distinction made and the words ‘family trust’ refer to a specific type of discretionary trust – one that has made a ‘Family Trust Election’.

    It is also possible for someone forming a unit trust to use the words ‘family trust’ in the name of the unit trust.


    I think it best to restrict the use of the term ‘family trust’ to a discretionary trust which has made a family trust election. But everyone uses these terms differently so don’t assume they are one and the same.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  3. Trainee

    Trainee Well-Known Member

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    But only discretionary trusts (or the discretionary element of hybrid trusts) can be family trusts? Ie a unit or fixed trust cannot be a family trust?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A unit trust could also be a family trust under Schedule 2F, so could a fixed unit trust - but not sure why they would want to make the election

    272-75 Family trust
    A trust is a family trust at any time when a family trust election (see subsection 272-80(1)) in respect of the trust is in force.
     
  5. Never giveup

    Never giveup Well-Known Member

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    In what situeation discretionary family trust is useful?


    And what defines Family ? Couple (husband wife) or must have other parties like .kids, parents etc?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The 3 main uses are, broadly:
    a) asset protection
    b) tax minimisation, and
    c) estate planning

    The deed will define 'family' as will tax legislation in relation to family trust elections
     
  7. Never giveup

    Never giveup Well-Known Member

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    Thanks Terry- FA or Tax Advisor suggeat and set this up for people?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Come on!

    Neither. Only lawyers can set up trusts.
     
  9. Never giveup

    Never giveup Well-Known Member

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    I have been reading anout it and you have couple of threafs that overlap DTF but unsure if it is suitable for someone like me (37%) and my wife (30% tax bracket)

    Couple of IPs and starting share portfolio as part of DR.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What do you mean by DTF?
    You should seek some legal advice on the potentially suitability.
     
  11. Never giveup

    Never giveup Well-Known Member

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    Thanks Terry

    Suppose to be DFT (Discretionary family trust)
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Generally I just call them DTs - discretionary trusts.
     
  13. Never giveup

    Never giveup Well-Known Member

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    Thx for the tip!
     
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  14. thydzik

    thydzik Well-Known Member

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    Possible to go into more details on the benefits of FT over DT.
     
  15. Trainee

    Trainee Well-Known Member

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    What would be an example where a DT with no family trust election is more appropriate than a DT with a family election?
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Always without a FTE is better. The trustee should only do a FTE if one is needed.
     
  18. Trainee

    Trainee Well-Known Member

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    The FTE narrows the beneficiary class, but then allows distribution of franking credits >5k?
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes
     
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Family Trust Elections are required for certain issues incl tax credit distribution and use of losses. A FTE is best deferred until required. A FTE will need to consider and nominate a test individual who is the basis for the "family" group entitled to income. Once made they are generally not revokable. I often refer some groups for legal advice before making a FTE since estate planning can impact the election and I cant read a will and then give advice on that impact as that would be legal advice. Do wills consider trust/trustee control ? My general rule is I dont read wills. eg what occurs if the test individual dies ? Does the estate planning need to consider this ?

    Often a trust also needs to consider a interposed entity election at the same time as a FTE