Legal Tip 371: You are Not the Only Beneficiary of that Discretionary Trust!

Legal Tip 371: You are Not the Only Beneficiary of that Discretionary Trust!


I often hear clients telling me that they are the only beneficiary of ‘their’ discretionary trust. Although this is theoretically possible it would be extremely unlikely that a discretionary trust would be set up with just one beneficiary. To be a discretionary trust there needs to be some discretion, which might be possible with one beneficiary – the trustee could retain income or distribute it to the sole beneficiary, not much of a discretion.

A Superannuation Proceeds Trust could end up with one beneficiary though.

These one beneficiary discretionary trusts would offer virtually no asset protection because the sole beneficiary has something extremely close to an absolute entitlement.


When people say they are the sole beneficiary I ask them if they have read the deed. They say they have, but this cannot be the case because the deed would show that they might be the only named beneficiary but the deed is worded so that related family members, and their spouses and related companies are also beneficiaries.Most discretionary trusts would have hundreds if not thousands of beneficiaries. The beneficiaries of a discretionary trust will also be changing over time. None of these beneficiaries have any rights over the trust asset (usually) and this is what gives discretionary trusts their strength in asset protection.


See Legal Tip 206: Can a discretionary trust only have one beneficiary?
Legal Tip 206: Can a Discretionary Trust only have one Beneficiary?

and
Legal Tip 368: Fluid Beneficiaries of Discretionary Trusts
Legal Tip 368: Fluid Beneficiaries of Discretionary Trusts

 

Care must be taken that UNIT trusts with one unitholder who is the same as the trustee may be a major concern. I have seen it. Usually not setup that way as the legal parties who settle and draft the trust know of the issue but at some time some poorly intentioned taxpayer or tax adviser who doesnt know better does something so that there is one unithlder who is the same as the (human) trustee. A legal problem. This feature doesnt exist with most discretionary trusts.

I have seen one of two instances of people who have amended a disc trust to exclude beneficiaries so that clauses which exclude all beneficiaries bar one person are drafted without legal advice. This can pose a problem for stamp duty, CGT and the issue of asset protection. Changes to trusts should always be given legal advice.