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Family discretionary trust

Discussion in 'Accounting, Tax & Legal' started by Tommy01012017, 23rd Mar, 2017.

  1. Tommy01012017

    Tommy01012017 New Member

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    A family discretionary trust is where the beneficiaries are all predominantly family or related members of the same family and the trustee has full discretion which beneficiary gets which distribution portion of income or capital of the trust.
    (From How Discretionary Trust Works | Starting Family Trust ATO)


    I have been reading lots websites about family discretionary trust. My understanding is my taxable income can distribute to my family.

    For example, if I earn $100,000 in one year, I open a trust account and put $100,000 in to the trust. Then, I can distribute it to my father, mother and sister (they have $0 income) $25,000 each. We all pay lower tax rate.

    Am I right? Can anyone tell more details how dose Family discretionary trust work? Many thanks.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That's not really how it works.

    If you earn $100,000 in one year, you'll be paying tax on that yourself. Any money you subsequently put into the trust is after-tax capital. The trust can potentially distribute capital to beneficiaries - but you've already paid tax on it (you'd have less than $100,000 to put into the trust after tax), so there's no real value in doing so.

    Typically, the trust only distributes income that it earns itself (not income that you earn).

    So what happens is that you put capital into the trust (either as a gift or as a loan from you to the trust) and then the trust invests that money and any income it earns from those investments gets distributed to beneficiaries who pay tax on that distribution.

    It is possible to operate a business via a discretionary trust - but that's a bit of a special case.
     
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  3. Terryw

    Terryw Well-Known Member

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    No.

    The trustee will earn income and distribute this income to the beneficiaries who will pay tax on it
     
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  4. coolcup

    coolcup Member

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    Is there any benefit in setting up a family discetionary trust if I don't have adult children versus just making investments in my wife's name (who pays a lower marginal rate of tax)? The only benefit I can see is that it offers the flexibility that in the future, if my wife's rate of tax increases above my own then we can stream the income to me rather than her. Am I missing something?
     
  5. Terryw

    Terryw Well-Known Member

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    Flexibility to distribute to a bucket company too.

    Consider the non tax aspects too
     
  6. coolcup

    coolcup Member

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    Thanks Terry.

    Non tax aspects as in asset protection? Or am I missing something yet again?

    If I put holdings in my wife's name - does that add the same asset protection if I am the only person in the relationship likely to be personally liable for anything?
     
  7. Terryw

    Terryw Well-Known Member

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    Asset protection is one, estate planning is another.

    If you put 'your' holdings in your wife's name that is a trust relationship. If she buys assets herself that is different and this has advantages and disadvantages over a discretionary trust.

    as an example If you gift your wife $100,000 and she buys $100,000 worth of shares - they are her asset and she can dispose of them at will to whoever she wants. She could go bankrupt and lose the lot. She could lose capacity and have her mother act as her enduring attorney, she could die and leave them to donald trump etc.
     
  8. coolcup

    coolcup Member

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    Good points and well made. Thank you.
     
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