So you have heard all about a discretionary trust, but you want to know what is a discretionary trust used for? Here are some common uses at a glance:
- Family business operations
- Investment property holdings
- Share portfolio management
- Protecting family assets
- Tax-effective income distribution
- Estate planning
- Succession planning
- Professional practice structuring
Family Business Operations
Operating a Family Business
A discretionary trust is commonly used to run family businesses. The structure allows family members to work in the business while providing flexibility in how profits are distributed. For example, a family retail business might employ the parents full-time, with adult children working part-time, while allowing profit distribution based on both contribution and tax efficiency.
Key business advantages include:
- Flexible profit distribution
- Asset protection from trading risks
- Easy inclusion of family members
- Succession planning options
Business Asset Protection
The trust can own valuable business assets (like premises, equipment, or intellectual property) while the operating entity remains separate. This creates a safety net – if the business faces difficulties, its core assets remain protected within the trust structure.
Investment Holdings
Property Investment
Property investors often use discretionary trusts to hold their investment properties. This approach offers several benefits:
- Flexibility to distribute rental income among family members
- Protection of the property from business risks
- Ability to pass properties to the next generation without triggering stamp duty
- Capital gains tax advantages when selling
Real-world example: A family trust holding three investment properties can distribute rental income between family members to maximise tax benefits while maintaining central control of the property portfolio.
Share Portfolio Management
For share investors, discretionary trusts provide an effective structure for:
- Managing family investment portfolios
- Distributing dividend income efficiently
- Handling capital gains strategically
- Long-term wealth accumulation
Professional Practice Structuring
Professional Services Businesses
Many professionals use discretionary trusts as part of their business structure:
- Medical practitioners
- Accountants
- Legal professionals
- Consultants
The trust structure allows them to:
- Protect personal assets
- Share income with family members
- Plan for succession
- Manage practice assets separately from operations
Wealth Protection
Asset Protection Strategies
One of the primary uses of discretionary trusts is protecting family wealth. This includes:
Personal Asset Protection:
- Keeping personal assets separate from business risks
- Protecting inheritance from potential claims
- Securing assets for future generations
- Sheltering wealth from legal challenges
Business Asset Protection:
- Separating valuable assets from trading entities
- Protecting intellectual property
- Securing business premises
- Safeguarding investment portfolios
Estate Planning
Intergenerational Wealth Transfer
Discretionary trusts excel at managing wealth across generations:
- Controlled transfer of assets to children
- Protection of family wealth
- Tax-effective inheritance planning
- Maintaining family harmony through structured distribution
Succession Planning
For business owners, trusts provide a framework for:
- Gradual transition of control
- Merit-based succession
- Preserving business value
- Supporting retiring family members
Special Needs Planning
Supporting Family Members
Trusts can be particularly useful for:
- Providing for disabled family members
- Supporting elderly parents
- Helping with education expenses
- Managing healthcare costs
The discretionary nature allows trustees to respond to changing needs while protecting vulnerable beneficiaries’ government benefits.
Tax Management
Income Distribution
A key use of discretionary trusts is tax-effective income distribution:
Distribution Options:
- Splitting income among family members
- Utilising lower tax brackets
- Streaming different types of income
- Taking advantage of tax-free thresholds
For example, a trust earning $200,000 could distribute income among family members to minimise the overall tax paid, while maintaining control over the actual cash distributions.
Investment Growth
Building Family Wealth
Trusts provide a structure for:
- Long-term investment strategies
- Reinvestment of profits
- Portfolio diversification
- Risk management
Practical Considerations
Setting Up a Trust
When establishing a discretionary trust, consider:
- Setup costs ($1,000-3,500 typically)
- Ongoing compliance requirements
- Need for professional advice
- Regular review of trust strategy
Professional Support
Essential professional support includes:
- Accountant for tax planning
- Lawyer for trust deed
- Financial advisor for investment strategy
- Regular professional reviews
Common Scenarios
Who Should Consider a Discretionary Trust?
A discretionary trust might be suitable if you:
- Run a family business
- Own investment properties
- Have a share portfolio
- Need asset protection
- Want tax-effective structures
- Are planning succession
- Have complex family needs
Wrap Up
To summarise what a discretionary trust is used for:
- Business operations
- Investment holdings
- Asset protection
- Tax management
- Estate planning
- Family wealth management
The key is matching the trust’s use to your specific circumstances and ensuring proper professional setup and management.
Next Steps
Before setting up a discretionary trust:
- Identify your primary objectives
- Consult with professionals
- Consider ongoing costs
- Plan for compliance
- Review family circumstances
- Document your intentions
Remember that professional advice is essential to ensure the trust meets your specific needs and complies with current legislation.
