Strategy 4 – A discretionary trust

This strategy takes one of the previous investment strategies and places it into another structure which you may not be familiar with—a trust.

Trusts are not uncommon and there are many types. There are two types of trusts, however, which are used more often than others. They are:
• discretionary trusts
• unit trusts.

However, for the context of this book, I will focus on one main type of trust and avoid going into too great a detail—discretionary trusts. There are many books that cover trusts and I suggest you get as much background information as possible before you take on this strategy.

So, who is involved in a trust and what are their roles?

There are a number of parties or people involved in a trust. They are:

Appointor The boss, the person with the most control. The appointor has the power to change the trustee and appoint a new one at any time
Trustee The person/s or company that controls the trust
Trust The structure that holds the investment assets
Beneficiaries Owners of the assets and entitled to the income of the trust

Financial Adviser Provides advice and manages the affairs
Solicitor Establishes the trust
Accountant To liaise with the adviser and prepare the regulatory requirements for the ATO

One point to always keep in the back of your mind with a trust; you (as the trustee) are the legal owner of the trust property although you are not the beneficial owner of the assets. The trustee has the responsibility to manage the trust assets and must act in the best interest of the beneficiaries.

Note: I may have already started to confuse you at this point. This area requires sound legal and accounting advice to ensure you have the right trust tailored for your situation. Don’t always assume the ‘off the shelf trust’ is right for you. You are far better to pay more for a tailored structured trust than a run-of-the-mill document.

A discretionary trust is called just that because the trustees (typically the parents in this context) can determine how much income may be paid to the beneficiaries of the trust. It is their discretion. The trustees can vary this amount from year to year.

A discretionary trust can achieve a number of objectives:
• It will take care of your family for the long term
• It has sound asset protection. That is your assets may be protected from creditors.
• A trust can be very flexible. It can assist in sharing the tax burden among your family and/or other members of the trust.
• It can trade in its own way but it is different from your personal tax structure and/or a company tax structure.

Jonathan Cattana: How much will a financial advisor cost?

How much will a financial advisor cost?
There are two ways financial planners charge:
• A fee for service – a yearly fee or a percentage of your assets invested whereby you are managed at all times by your adviser. If there are any investment commissions or trailing income paid they are rebated back to the client:
• Commissions and trail commissions – this is where the adviser is paid via a product supplier in order to pay for the client’s cost.

Would you pay an adviser a yearly fee? This is purely your decision and sometimes a planner will only work in one particular way anyway. What is required by law though is that they give you a written Statement of Advice (SoA). This term has replaced the more common term ‘financial plan’.

What does a good financial advisor do?
First, all advisers want their clients to succeed. A financial planner provides strategies to help you be on the right road map for your personal and financial goal whatever they are.

For example, what are your goals? If you look at your children as an example, there are a few life goals that your child will go through which your financial adviser can help you plan for:
• school education.
• university education.
• an investment portfolio which may be invested in their first property
• funding their wedding
• assisting them to purchase their first home.

[Insert Road Map – to come – Margaret to do]

A financial adviser ensures that along the way towards saving for your life goals, nothing is left to chance. You have an end result and you simply work backwards and plan every last detail.

This does not mean that you, the client, needs to know all the strategies and legal and tax implication—that’s the planner’s job. However, the client needs to be aware of the disciplines of managing their own cash flow. Cash flow management is the main driver and the separator between success and failure in any financial objective.

A financial planner cannot guarantee returns (if one does then run the other way quickly). The role of a financial planner is to demonstrate the relativity of market returns between the asset classes you are looking to invest in.