Family (Discretionary) Trust Deed
A Discretionary Trust Deed suitable for a Family Trust. This Discretionary Trust Deed deed gives the trustee a power to decide the proportions in which the trust fund will be distributed among the beneficiaries.
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.
In a discretionary trust (or family trust) the beneficiaries do not have a fixed entitlement or interest in the trust funds. The trustee has the discretion to determine which of the beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive.
Trusts can be created in a number of ways:
- by express declaration where the present owner of certain property declares themselves trustee of that property for the benefit of others;
- by transfer to trustees;
- by way of direction to a trustee of an existing trust;
- by will
- by agreement or common intention; and
- by execution of a deed of trust (which invariably includes the transfer to the trustee of some property, usually money, to constitute the trust fund).
This commentary will cover the last method of trust creation. This is the method of creating a trust most commonly used when a client requests their solicitor to create a trust for them.
To be “completely constituted” a trust must:
- display a sufficiently certain statement of intention on the part of the person creating the trust;
- the deeds of trust use words such as “To hold upon trust for” for this purpose.
- be in writing;
- have the trust property vested in the trustee;
- be accepted by the trustee so that they are bound by the trust; ie. The trustee company passes a resolution that it accepts the role of trustee under the trust deed; and
- identify or describe the beneficiaries or objects of the trust with sufficient certainty .
Express voluntary trusts are invariably created by express declaration of trust or by transfer of the trust property to the intended trustee.
In practice, most trusts are created for clients by the execution of a deed of trust by the trustee, the deed setting out the express terms of the trust, and by the “settlement” on the trustee of a nominal sum, say $10, by the “settlor”, who is also a party to the deed. It is common for a trust to be established by the settlement of a nominal sum, say $10, with the trustee on the creation of the trust while the other assets of the trust are transferred later by way of purchase, with the necessary funds being loaned to the trust for the purpose. The method chosen will usually be determined by the stamp duty and any other tax implications.
Discretionary trusts are trusts under which the trustee has a “discretion” as to the manner in which the trust property, usually both the capital and the income of the trust fund, will be distributed. This discretion gives the trustee a power to decide the proportions in which the trust fund will be distributed, or “appointed”, among the beneficiaries. The basic machinery of a discretionary trust is a power of appointment. A power of appointment is an authority vested in a person to deal with or dispose of property. Often the trust will then use language to the effect of, “including power to appoint in favour of one to the exclusion of all others”. As a result no beneficiary or object of a discretionary trust has any entitlement to any specific part of the trust property, whether capital or income, unless and until nominated by the trustee.
A discretionary trust is most suited to a family situation as a business relationship will require a greater degree of certainty and security in financial dealings affecting trust property.
None of the beneficiaries can demand anything from the Discretionary Family Trust. It is the Trustee (acting under the advice of the Appointor) who decides who gets what. Therefore, your class of beneficiaries can be as wide as possible.
The flexibility of a unit trust often results in its choice as the preferred structure for many commercial ventures where the units are generally held by the trustee of each investor’s family discretionary trust.
A unit trust created by the precedent is created by a deed between a trustee and the “initial unit holder” who contributes an amount of money which establishes the trust and creates units held by the initial unit holder. Thereafter, units can be issued to the other investors.
There must be no more than 20 unit holders. Under s 601ED of the Corporations Act 2001 (Cth), the unit trust must be a registered managed investment scheme if there are more than 20 unit holders.
The precedent deed requires a certain percentage of units to consent to or initiate various actions. This percentage can be varied depending on the preference of the client.
A trust will only continue to exist where there is trust property. If the settled sum is placed in the trust general bank account and that bank account goes into overdraft, the trust will cease to exist.
A popular method of avoiding this problem is as follows: The $10 or other nominal amount, comprising the settlement sum should be clipped to the trustee’s file, this will ensure that there is always some trust property in existence. (provided that it is not lost).
Avoid a situation in which a sole director, sole shareholder of the trustee is also a beneficiary of the trust. The question could arise whether the sole director/sole shareholder/beneficiary by virtue of their position as sole controller of the corporate trustee and as a potential beneficiary of the trust effectively held personal and thus beneficial control over the trust property thereby negativing the existence of any trust.
Upon accepting the trust, the trustee will be obliged to take possession of any trust property, and to ensure that any trust property is duly conveyed to them. This extends to debt recovery where money is owed to the trust.
The duty to invest the trust fund properly involves balancing of a number of competing factors. Trustees are required by statute to have regard to a range of matters when considering any exercise of the power of investment. See s 14C of the Trustee Act 1925 (NSW).
Settlor and Appointor
A Settlor should never be a beneficiary, See s102(1) Income Tax Assessment Act (1936). It is prudent not to make the settlor of a trust the appointor, if the trust is to include an appointor. Particularly if the trust is a discretionary trust in which the trustee has power to add beneficiaries. The settlor could then, as appointor, appoint themselves as trustee, add themselves as a potential beneficiaries and then, assuming the trust is a discretionary trust in which the trustee can distribute all the trust property to one beneficiary to the exclusion of all others, resolve to distribute all the trust property to themselves. The law requires that the settlor must display a sufficiently certain intention to create a trust. While no magic words are absolutely necessary, in a deed of trust it is prudent to use words clearly indicating an intention to create a trust, such as “To hold upon trust for” and similar. If words displaying such an intention are used, but the tenor of the whole instrument is such that no trust is in fact intended, the supposed trust will fail for want of sufficient certainty of intention to create a trust. Where, for instance, a settlor transfers property to a nominated trustee upon trust in accordance with the terms of a deed, but the terms of the deed are such that the settlor can, by his own action, recover all the property of the trust and in effect unravel the trust, or prevent the trustee from making any distribution in favour of the nominal beneficiaries, the trust may be held to lack the necessary certainty of intention.
The precedent documents include a Statutory Declaration by a director of the trust to the effect that the only assets of the trust at the time of execution was the $10 paid to it by the settlor. The Office of State Revenue charges $500.00 ‘nominal’ duty on all trust deeds as long as the amount of trust property does not exceed $800.00. The rate of duty chargeable is 60 cents per $100, or part, of the dutiable value of the shares or units.
A Declaration of Trust is a dutiable transaction and generally liable to full duty based on the value of the dutiable property the subject of the trust. See s8(1)(b) of the Duties Act 1997. A Discretionary Trust is one in which the entitlement of the beneficiaries to income and/or capital is not immediately ascertainable. Rather, any entitlement is determined by the trustee (or some other person) from time to time or at maturity of the trust.
The dutiable value is the greater of the market value or consideration paid for the shares or units.
A minimum duty of $10 per transfer applies.
The transferee is the person liable to pay the duty.
Duty must be paid within 3 months of the date of first execution of the agreement or transfer.
Land & Property Management Authority Requirements
When purchasing land in the name of a trustee, it is not necessary to include the words “…as trustee for the XYZ trust”. In fact, if this wording is included the Transfer will not be accepted for lodgement. The following is an extract from the Registrar General’s Directions on filling out the Transfer:
“The dealing must not include any reference to the transferor or transferee being a trustee, executor or administrator for another party.”
This Family Discretionary Trust Deed is 21 pages long.