Asset rich individuals and business owners need to take stock of their particular circumstances and take time regularly to review how their assets are held. Individuals should aim to hold their investments in ways that protect assets and are tax effective.

This strategy requires a three- pronged approach to:

1. Minimise tax exposure

2. Isolate business and personal assets

3. Hold assets in a separate entity

There are several methods to achieve this, but none more common than the use of a discretionary trust.

What is a Trust?

A trust is created as a result of forming a relationship where a person (the trustee) has an obligation to hold property for the benefit of another person (the beneficiaries).

A trust is not a separate legal entity. However it is, required to have its own set of accounting records and lodge tax returns with the Australian Taxation Office each year.

What is a Discretionary Trust?

In a discretionary trust, beneficiaries are not entitled to a fixed distribution or interest in the trust funds. The trustee

has the discretion to decide which beneficiaries receive the capital and income of the trust and how much each beneficiary receives. The level of discretion is determined by terms of the Trust Deed, which governs the operation of the trust.

A properly established trust will provide asset protection in the case of unexpected financial setback or litigation.

Assets held in a discretionary trust are generally not available to a trustee in bankruptcy. The exception is when assets have been transferred to a discretionary trust with the intention of defeating creditors.

Distribution of Income

The Trust Deed sets out various alternatives for the Trustee in relation to trust income earned in each financial year. These alternatives include:

1. The trustee may distribute the net trust income amongst the beneficiaries. All the trust income can be distributed to one beneficiary to the exclusion of others, the income can be distributed equally, or it can be distributed disproportionately.

2. The trustee may decide not to distribute any proportion of the net income of the trust but to accumulate that income as an addition to the Trust Fund.

3. The trustee may decide to distribute part of the net trust income and to accumulate the balance of that income.

Each option presents the trustee with a different tax exposure for the trust or beneficiaries.

From a tax perspective, discretionary trusts are an excellent way to split investment capital gains and income with beneficiaries, particularly when beneficiaries have differential marginal tax rates.

The trustee has the discretion to distribute profits to the lowest-taxed beneficiaries.

The decision to form a discretionary trust is one that must be made by taking into consideration one’s personal, financial, and legal circumstances and adopted as part of an overall asset management plan.

Discretionary trusts are an excellent vehicle to protect assets. If you are not sure what steps to take next, or whether or not a discretionary trust would assist you with asset protection, an Oculus Adviser would be delighted to speak with you about your options.