Transferring control of a discretionary trust – what you should consider
For many years, Australians and organisations, including small businesses, SMEs and farmers, have used a discretionary trust to provide the benefits of asset protection, estate planning and tax optimisation. But, as baby-boomers approach their twilight years, it’s imperative for them to consider transferring discretionary trust control to the next generation.
What is a discretionary trust?
A discretionary trust is controlled by a person, known as the trustee, who has powers including the authority to choose the amount of money that will be paid to each beneficiary of the trust.
The trustee also signs documents on behalf of the trust and has a duty to act in the best interests of the beneficiaries. Many people may have heard of family trusts, which are discretionary trusts set up to hold a family’s assets, or to conduct a family business.
Important points to consider before transferring control of a discretionary trust
Deciding to transfer the control of a discretionary trust is a big commitment. Careful consideration must be given to ensure the continued well-being of the family finances and the safeguarding of assets that have been accumulated over a lifetime, or even generations.
It’s a decision that needs to take a number of factors into account.
Impact on retiring controllers of the trust
A vital question to consider before transferring control of a discretionary trust is whether the retiring controllers will maintain some degree of control of the trust.
Also, will they continue to derive income to support themselves from the discretionary trust? This is a factor that could also offer them security if the incoming controllers were to “go rogue” and exclude them from distributions.
Planning for the ongoing protection of the trust’s assets
Protecting the assets of the discretionary trust is vital, especially if an incoming controller were to suffer a relationship breakdown, mental disability or gambling addiction.
Transfer of control must be equitable and fair
The transfer of control must ensure that equity and fairness are achieved for each beneficiary of the trust, not only the incoming controllers.
Anyone who has a legitimate expectation of deriving benefit from the trust, such as the children and grandchildren of the retiring controllers, needs to be well looked after.
Possible adverse effects on tax and stamp duty
Forethought must be given to the possibility that a change in control of a discretionary trust could trigger an unintended adverse liability for GST, capital gains tax or stamp duty.
Unpaid present entitlements of retiring controllers
It’s critical that both unpaid present entitlements which the trust owes the retiring controllers and any amounts which the retiring controllers owe the trust are dealt with appropriately, without impacting the financial stability of the trust.
Transferring control of a discretionary trust is a complex process
Transferring control of a trust can be complicated, with a range of legal technicalities that need to be made watertight for the security of its beneficiaries. Every trust is different, so any changes or updates need to be undertaken with great care and consideration for each particular family’s circumstances.
Before considering this transition, it’s advisable to obtain guidance from experienced legal and financial practitioners.
For more information please see Testamentary trust or discretionary trust – which is best for you?