A discretionary trust is an extremely popular choice for all types of investments as it provides great flexibility to make income and capital distributions to various family members and their related entities.
The ability to split the trust income in the most tax advantageous way each year is clearly an attractive trait of a discretionary trust.
This feature is further enhanced by the fact that amounts derived by the trust effectively retain their character when distributed to the beneficiaries.
Consequently, this allows for non-assessable amounts for example pre-capital gains tax, amounts arising from the capital gains tax 50% general discount, the small business concessions et cetera, to be distributed tax effectively to the beneficiaries, which cannot be achieved via a company or unit trust structure.
Another desirable feature of a discretionary trust is its potential asset protection qualities. A discretionary trust with a corporate trustee has traditionally been regarded as an effective structure for asset protection purposes on the basis that the corporate trustee only acts in its capacity as trustee of the trust and trust creditors generally only have recourse against the corporate trustee’s assets and the assets of the trust.
Creditors generally have no claim against the trust beneficiaries’ assets.
Accordingly it is prudent to ensure the corporate trustee does not have any assets of significant value.
As no one beneficiary has direct ownership of the trust assets, this allows for flexibility in making distributions to various beneficiaries each year in order to achieve the best tax outcome.
This structure, which has no clear ownership entitlements, is also one of its main drawbacks where unrelated parties for example business partners, want to be in business together.
In those circumstances the use of a partnership of discretionary trusts or a unit trust, could be more appropriate.
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